The main behind enacting the Insolvency and Bankruptcy Code of 2016 was to combine and amend such laws that relate to the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a timely manner in order to maximize the value of such person’s assets, to encourage entrepreneurship, increase access to credit, and balance the stakeholder’s interest, including changing the order of priority for payment of government dues and establishing. The term “Corporate Insolvency Resolution Process” (CIRP) refers to insolvency proceedings involving corporations. Under this procedure, any corporate debtor who defaults would permit a financial creditor, an operational creditor, or the corporate debtor itself to start a corporate insolvency resolution process in relation to that corporate debtor. The creditors of the corporate debtor can recover money through the Corporate Insolvency Resolution Process (CIRP). A corporation or Limited Liability Partnership (LLP) that owes money to its creditors is referred to as a corporate debtor.
The requirements for conducting insolvency or bankruptcy of individuals, partnership firms, LLPs, and enterprises are laid forth in the Insolvency and Bankruptcy Code, 2016 (the “IBC”). However, the IBC’s bankruptcy and liquidation procedures for corporate debtors only apply when there is a minimum default amount of Rs. 1 crore.
What is Corporate Insolvency Resolution?
Companies take loans from creditors or operational creditors, and they are required to repay the loan amount within the specified time. Now, if the company cannot pay off the debt within the specified time, the loan becomes due. Therefore, in the previous time, if the company was unable to pay the debts, then there was a concept of the company winding up, but due to this economy suffered huge losses. To eradicate the concept of winding up due to non-payment to creditors, the Corporate Insolvency Resolution Process (CIRP) was brought.
With this process, if the company is unable to pay off the debts, then some other company or individual can pay the company’s debts and acquire the company. This helped in the revival of the company. After this, default in payment to the creditors is no longer a ground for company winding up, and in place of this, the process of CIRP has been inserted. Now, as the loan repayment time limit is passed, and the company has made default, the financial and operational creditor can file the application for repayment of their money to the NCLT with proof of such default proposed interim resolution professional for carrying out the process of CIRP.
Who are Financial Creditors?
The financial creditor is an individual or company to whom the opposite party owns a certain amount of money. These are generally banking institutions that provide loans to companies for business expansion.
Documents Required By Financial Creditors to Submit For Repayment:
These are the documents submitted by the financial creditors along with the application to the NCLT for repayment of their loan amount:
- Any such document can be used as evidence of the default committed by the company.
- They are also required to propose a name of any such officer that can act as an interim resolution professional.
- Other information or documents as the board may require.
Who are Operational Creditors?
Operational creditors are not any financial institutions; they are the normal people who have provided a loan to the company for any specific reason. They may be employees, government, vendors, suppliers, etc.
Documents Required By Operational Creditors to Submit For Repayment
These are the documents submitted by the operational creditors along with the application to the NCLT for repayment of their loan amount:
- Copy of the invoice or demand letter that the operational creditor has sent to the business debtor.
- An affidavit showing that the corporate debtor has not provided notice of a dispute about the outstanding operating debt.
- If available, a copy of the certification from the financial institutions managing the operational creditor’s accounts stating that the corporate debtor has not paid any outstanding operational debts.
- A copy of any information utility report that, if available, confirms that the corporate debtor has not paid any outstanding operating debts.
- Any additional evidence must be that show that the corporate debtor has not paid any outstanding operating debt amount or any other document as prescribed by the Central Government.
Steps Involved In Corporate Insolvency Resolution Process
Here are the steps involved in Corporate Insolvency Resolution Process:
- Filing an Application to the NCLT
Firstly, file an application to the NCLT for repayment of the outstanding by the creditor. Along with the application, the creditor is also required to submit any other document that can be used as evidence to ascertain that the company has not made any repayment of the outstanding loan amount. Moreover, the creditor is also required to propose a name of an individual who can work as an interim resolution professional.
On receiving the application, the NCLT will check the application and the background of the person whose name has been suggested for becoming an interim resolution professional. If the NCLT is satisfied with the application, they will proceed. If some mistakes are found, NCLT will send a notice to the applicant, ask him to correct the errors, and send it back within seven days of intimation.
- Commencement Date of CIRP
This is the date on which the Corporate Insolvency Resolution Process admits the application of the creditor. It is the process of CIRP that the entire resolution of the company shall be completed within 180 days which may be extended to not more than 90 days if approved by the NCLT. Now, this time period starts on the date of commencement of Corporate Insolvency Resolution Process, that is, the date on which the NCLT admits the application.
- Interim Resolution Professional Is Appointed For an Interim Period
The board of directors is reviewed before a corporate debtor is admitted to the CIRP (Corporate Insolvency Resolution Process). Additionally, the management is entrusted to a neutral “interim resolution professional”. The management loses all control over the operations of the firm starting at this point and continuing through the completion of the CIRP (Corporate Insolvency Resolution Process).
This is a process under which all the company transactions are seized, including all the civil proceedings, execution of the decree, and order. Moreover, any application or proceedings on account of the recovery of shares cannot be initiated.
- Verification of Claims
The appointed interim resolution professional verifies and complies with the claims of the creditors and makes a record. Moreover, he incorporates a committee of creditors. This company generally involves financial creditors, but if there are no financial creditors in the company, then the top 18th largest operational creditors, based on the value of their debts, one representative of workmen and one representative of employees, will form the committee.
- Appointment of Resolution Professional
After making the Committee of Creditors, the first resolution will be passed regarding the appointment of a Resolution Professional during the committee’s first meeting. It says “whether this interim resolution professional is fit for the purpose of continuing as a resolution professional”. Now, the committee, with 66% of the majority, will decide whether the interim resolution professional will continue as resolution professional or not. If the majority favours the interim resolution professional, he will continue being a resolution professional and carry on the further process. Suppose the committee does not want the interim professional to serve as the insolvency resolution professional. In that case, they will recommend the name of the new professional to the NCLT, and the new resolution professional will be appointed if the NCLT is satisfied by the name suggested by the creditor’s committee.
- Information Memorandum
Now, the appointed resolution professional will prepare the information memorandum containing details of all the assets, liabilities, and other important details about the company. He is also required to verify the claims of the creditors.
- Resolution Applicant
A resolution applicant is a person who decides to take over the company after paying off all the company liabilities. He checks the information memorandum of the company prepared by the resolution professional, and on the basis of this memorandum, he prepares a resolution plan and submits it to the insolvency resolution professional.
- Resolution Plan
The resolution professional checks whether all the requirements, such as payment of the cost of CIRP, repayment of the full amount of debt of the financial and operational creditors, and correct implementation of the resolution plan, are fulfilled. If all the requirements are fulfilled in the resolution plan, and the resolution professional is satisfied, he will place this plan before the committee of creditors.
Now, in order to approve the plan, the committee must have 66% of the majority to pass the resolution if they find that the resolution plan can satisfy all the debts and be in accordance with the law. After approval from the committee, the resolution professional will send the plan to the NCLT for final approval.
If NCLT Approves the Resolution Plan
The NCLT will give final approval if all the required conditions are fulfilled in the plan, such as:
- CIRP Cost
- Repayment of debt
- Proper implementation
Once the NCLT approves the plan, it will be binding on everyone.
If NCLT Does Not Approve the Resolution Plan
The NCLT will not approve the resolution plan if it lacks something or if it does not fulfil all the required criteria. If NCLT rejects the plan, they will order the company for liquidation, where the company’s revival and existence will end. Herein, all the company’s assets will be sold, and the revenue generated will be used for repayment of debts, and the company will dissolve. This is the last step when no option is left, and the company does not have the funds to operate further.
Corporate Insolvency Resolution Process is the process of saving a company from dissolution as to save the company and the economy of the company. A vast process is involved, which initiates when the creditors whose debts are unpaid within a period file an application to the NCLT for recovery of their amount. An insolvency resolution professional is appointed who takes care of the whole process.
Read Our Article: Understanding The Process Of Winding Up A Company In India