Decoding Insolvency and Bankruptcy Code – Part II

(Insolvency Resolution and Liquidation for Corporate Persons)

Part II of the Insolvency & Bankruptcy Code deals with Insolvency Resolution and Liquidation for Corporate Persons, which are covered under Section 4 – Section 32.

Corporate Persons means

•           a company as defined in clause (20) of section 2 of the Companies Act, 2013,
•           a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or
•           any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

Section 4 deals with the applicability of this part & states that Part II will be applicable to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees. Although CG may notify minimum or higher amount which shall not be more than 1 crore rupees.

Section 6 identifies the persons that can initiate the Corporate Insolvency Resolution Process (CIRP). These are the financial creditor, an operational creditor or the corporate debtor itself.

Here “Creditor” means any person to whom a debt is owed and includes:

•           a financial creditor,
•          an operational creditor,
•          a secured creditor,
•          an unsecured creditor and
•     a decree holder

The code has identified operational creditor and given him the power to initiate CIRP. “Operational Creditor” basically is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Whereas “Operational Debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

“Corporate Applicant” means—

(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorized to make an application under the constitutional document of the corporate debtor; or

(c) an individual who is in charge of managing the operations and resources of the corporate debtor; or

(d) a person who has the control and supervision over the financial affairs

of the corporate debtor;

For the purposes of this Part, Adjudicating Authority means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013

A new term “Information Utilities” have also come up in this Code which is basically the depositories of financial information. It will collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.

Initiation of CIRP

Initiator	Financial creditor	Operational Creditor		Corporate Debtor
Section	7	8&9		10
Demand Notice	Not required	on the occurrence of a default, operational creditor will deliver a demand notice demanding payment the corporate debtor shall, within a period of ten days bring to the notice either, the existence of a dispute, if any or repayment of unpaid operational debt		Not Required
Filing Application	File application to Adjudicating Authority (AA)	After the expiry of the period of ten days, file application to AA		a corporate applicant may file an application to AA
Other Required Documents	-          record of the default recorded with the information utility -          the name of the resolution professional proposed to act as an interim resolution professional -          any other information	-          a copy of the invoice demanding payment or demand notice -          an affidavit to the effect that there is no notice given by the corporate debtor -          a copy of the certificate from the financial institutions maintaining accounts of the operational creditor -          such other information -          may propose a resolution professional to act as an interim resolution professional		-          its books of account and such other documents -          the resolution professional proposed to be appointed as an interim resolution professional.
Existence of Default	Adjudicating Authority within 14 days of the receipt of the application ascertain the existence of a default
Accept / Reject	Accept if -          a default has occurred -          the application is complete, -          there are no disciplinary proceedings pending against the proposed resolution professional Reject if -          default has not occurred -          the application is incomplete or -          any disciplinary proceeding is pending against the proposed resolution professional		Accept if -          Application is complete -          no repayment of the unpaid operational debt -          the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor; -          no notice of dispute has been received or no record of dispute in the information utility -          no disciplinary proceeding pending against any resolution professional Reject if -          Application is incomplete -          there has been repayment of the unpaid operational debt -          the creditor has not delivered the invoice or notice for payment -          notice of dispute has been received by the operational creditor -          any disciplinary proceeding is pending against any proposed resolution professional		Accept, if Application is complete; or Reject if the application, is incomplete
	notice to the applicant by AA to rectify the defects in his application within seven days from the date of receipt of such notice
Commencement Period	CIRP shall commence from the date of admission of the application
Communication of the order	Within seven days of admission or rejection of such application

List of persons not entitled to make application.

1. a corporate debtor undergoing a corporate insolvency resolution process; or 
2. a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
4.   a corporate debtor in respect of whom a liquidation order has been made. 

   

Time Frame

The CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process. Although if a resolution is passed at a meeting of the committee of creditors by a vote of 75% of the voting shares the period can be extended up to but not exceeding 90 days. It is important to note that the extension of the period shall not be granted more than once.

Declaration of Moratorium & Public Announcement of CIRP

After admission of the application the AA shall, by an order, declare a moratorium & make a public announcement of CIRP. Moratorium is a temporary prohibition of an activity. A list of such prohibition is stated in Section 14 of the Code. It is specifically stated that where at any time during the CIRP, if the Adjudicating Authority approves the resolution plan or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

It is important to note that during the period of moratorium the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted

In my next blog, I will discuss about appointment, tenure, duties of an Interim Resolution Professionals, Committee of creditors & appointment of Resolution professionals and their duties

References:

-Insolvency and Bankruptcy Code

- http://www.arthapedia.in/index.php?title=Insolvency_and_Bankruptcy_Code,_2016#ref4

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