Before November 2016, there were a number of scattered bankruptcy laws which needed to be brought under one umbrella and this one ensured when the Indian Parliament passed the Insolvency and Bankruptcy Code, 2016. The Insolvency and Bankruptcy Code, 2016 is a comprehensive law that not only deals with the bankruptcy of corporations but also with partners and individuals. It was due to this act that the Insolvency and Bankruptcy Board (“IBBI”) was set up to regulate all matters related to Insolvency and Bankruptcy with the objective to complete insolvency resolution in a more transparent manner. It is applicable to any company incorporated under the Companies Act, 2013 or any other company which was incorporated or formed under any special statute. It is applicable to a partnership formed under the Partnership Act, 1932 or any other individual.
WHEN WILL AN INSOLVENCY RESOLUTION PROCESS INITIATE?
Any creditor can initiate an insolvency resolution under the IBC in a case where there is a minimum default of Rs.1,00,000 of that creditor’s debt by the debtor. In such a case an application can be filed by an operational creditor or a financial creditor before the National Company Law Tribunal (NCLT) as per the jurisdiction. If a person is not satisfied with the decision of the NCLT then the person can appeal in the National Company Law Appellate Tribunal (NCLAT). If a person wants to appeal further then he can go to the Supreme Court. A debtor is an entity or an individual who owes some kind of liability or obligation and includes a financial or operational debt. If a scenario arises where the debtor is an LLP or a company then it can be called a corporate debtor.
TYPES OF CREDITORS
In the IBC there are two types of creditors: (a) a financial creditor; (b) operational creditor.
(a) Financial Creditors:
A person to whom a financial debt is owed is known as a financial creditor. In this case, the relationship between the debtor and financial creditor is purely financial, mostly in the form of a loan. Financial debt may also contain interest as per the concept of the time value of money. Some examples of financial debt are:-
- Any money which has been borrowed against repayment of interest.
- Any money which has been raised against any accepted credit facility.
- Any money which has been raised through installments like bonds, notes, debentures, etc.
- Any money which has been raised through transactions like a forward sale or purchase agreements.
Financial creditors can be further divided into secured and unsecured creditors. Since the secured creditor’s name suggests they have a bit of advantage over the unsecured creditors. The advantage is that during the time of liquidation and asset distribution proceedings, the secured creditors are given a higher priority than unsecured creditors. In addition to that during the liquidation process, the secured financial creditors are given the same priorities as the employees for the repayment of dues and are given higher priority than the operational creditors who are the unsecured financial creditors during the time liquidation takes place.
As compared to operational creditors, the process of insolvency is a lot easier for financial creditors. As per IBC, the financial creditors have the power to directly send an application to the NCLT and such creditors need to just show the default. A very important edge which the financial creditors have is that there is a committee of creditors and only financial creditors can be part of that and no operational creditors.
It is important to mention that as per the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, the home buyers also included within the definition of financial creditors.
(b) Operational creditors:
An operational creditor is defined as a person to whom an operational debt is owed or to whom any such debt has been assigned. Under IBC, an operational debt is defined as any debt against the provision of goods and services which includes employment or dues which need to be paid to any government authority. While filling an application at the NCLT for the corporate insolvency resolution against the operational debtor, in addition to the requirements above the operational creditor needs to prove that there is no dispute regarding the operational creditor and the debtor with respect to the amount due.
In the case of Mobile Innovations Pvt Ltd v. Kirusa Software Private Limited, it was, “held that while determining if a dispute exists with the debtor with regards to the payment of any debt, the NCLT will be required to see only if there is a dispute and that the NCLT may not go into the merits of such dispute.”
HOW DOES CORPORATE INSOLVENCY RESOLUTION WORK?
The insolvency process can be divided into two parts. They are :
The Corporate Insolvency Resolution Process (CIRP)- This process is the part where the financial creditors investigate the corporate debtor in order to decide whether he can continue the business or not. The steps involved in the CIRP are:-
- Application to NCLT: In order to commence the insolvency resolution proceedings the creditor needs to file an application at the NCLT. The NCLT has to either accept or reject the application within the 14 days of its filling.
- Commencement of the insolvency process and management suspension: After the application is being accepted by the NCLT, immediately the management of the debtor is suspended and an interim authority is appointed by the NCLT and is officially referred to as ‘ interim insolvency resolution professional’ and this person takes over all the responsibilities of the management of the corporate debtor.
- Appointment of creditors committee: The interim insolvency resolution professional needs to appoint a committee of the creditors within 30 days of the acceptance of CIRP by the NCLT and investigate the claims which are made by the creditors.
- Approving resolution plan: The IRP is supposed to draw up a resolution plan for the revival of the corporate debtor and this needs to be done within 180 days of the initiation of the CIRP. This plan which has been formulated by the IRP needs to be accepted by the creditors holding at least 75% of the debts of the corporate debtor.
Liquidation process: If a situation arises where the CIRP fails, then the creditors always have the option to wind up the company and go for liquidation and distribute the assets among themselves as per preference prescribed under the IBC.
We can say that IBC has taken a good leap forward to organize the insolvency process in India. More than 11 legislation has been changed because of it and it would not be wrong to say that it has brought one of the biggest change in the commercial market. It is important for the banks as they use it to regularize a large number of non- performing assets which have been silent distress to the Indian economy. As per a report almost 11% of all the loans come under the category of bad loans, therefore the IBC is extremely important for the time being. The IBC tries to reduce the bad loans which have been a major hurdle in the growth of Indian economy. It is due to IBC only that nowadays many companies have successfully completed their insolvency process. The case where the Bhushan steel were purchased by the Tata steel was the first successful case of CIRP.
This Article is Authored by Alok Dubey, 1st Year, BA.LLB.(H) Student at Symbiosis Law school, Pune.
Also Read – IBBI Clarifies Role of RP & Liquidator in Avoidance Transactions