When an individual or entity is unable to repay their outstanding debts to their investors, creditors or lenders, they are termed as Insolvent and their state is legally known as Insolvency. In case of insolvency by a Private Limited Company or an LLP, the state is known as Corporate Insolvency. Under the new insolvency laws, creditors of a corporate debtor can file an application to initiate Corporate Insolvency Resolution Process to get the debtor declared as insolvent.
What is Corporate Insolvency?
A company is declared as an insolvent if it is unable to pay its debts to its creditors. There are two tests to check for the corporate insolvency in India:
- The cash-flow test: Is the company currently or will in the near future, be unable to pay its debts as and when they fall due for payment?
- The balance sheet test: Is the value of the company’s assets less than the total sum of its liabilities, taking into account uncertain and future liabilities?
If the company falls under the ambit of either of the tests, it is deemed to be insolvent. The creditors or investors of such corporate debtor can then proceed to file an application for its insolvency with the National Company Law Tribunal Board (NCLT).
The Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) came as a big relief and as an answer to concerns regarding corporate insolvency and protection of the creditors. It is the new bankruptcy law of India which seeks to synthesize the existing framework by creating a single law for insolvency and bankruptcy. This code is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically feasible arrangement. The code aims to protect the interests of small investors and make the process of doing business a bit less cumbersome.
The IBC Code also provides the provision for an application for insolvency and bankruptcy of start-ups, individuals, partnership firms, Limited Liability Partnership, and Companies. The Code has specified a category of starting amount in every category.
Functions of a Corporate Insolvency Regime
- It identifies the marks of insolvency at the earliest;
- Initiates the insolvency process precisely;
- Creates a collective platform of the stakeholders to enable them to make decisions about the future enactments of the distressed entity;
- Contributes to the reorganization of viable businesses;
- Disposes the unviable businesses to liquidation at the earliest, to capture any substantial loss in value.
What is Corporate Insolvency Resolution Process?
The Corporate Insolvency Resolution Process as per the provisions of IBC is as follows:
- Initiation of the Process: Where a company commits a default in payment of a debt of INR 1 lakh or more, a creditor (financial creditor or operational creditor) or the company itself may initiate CIRP (Corporate Insolvency Resolution Process) for it. A financial creditor or operational creditor may file an application before the NCLT (National Company Law Tribunal) for initiating the whole procedure.
- Order for Initiation of Insolvency Process: The Tribunal, within 14 days of the receipt of the application of the creditor (financial or operational creditor) ascertains the existence of a default from the records or on the basis of other evidence furnished by the creditor. When the Tribunal is satisfied that a default has occurred and the application is complete, the Tribunal passes the order for initiation of CIRP.
- Time Limit for Completion of CIRP: The CIRP has to be completed within a period of 180 days from the date of admission of the application to initiate such process. However, the Tribunal has the power to grant a one-time extension up to a further period of 90 days for completing the process on the application of resolution professional.
- Moratorium on Claims: Upon admission of the CIRP application by the Tribunal, creditors’ claims are frozen for 180 days, during which time, the NCLT hears proposals for revival and decides on the future course of action. The Tribunal can declare moratorium for prohibiting:
- Continuation or initiation of any legal action against the corporate debtor,
- Transfer of their assets,
- Enforcement/Enactment of any security interest,
- Recovery of any property from it by an owner,
- Suspension or termination of the supply of essential goods and services, the moratorium lasts till the corporate debtor is in CIRP.
- Appointment of Interim Insolvency Professional (IP): The NCLT appoints an interim resolution professional within 14 days from the insolvency commencement date. This professional verify the claims made by the creditors and classify them as well.
- Committee of Creditors (COC): The interim resolution professional, after collation of all claims received against the company and determination of the financial position of the company, constitutes a COC within 30 days of its admission into the CIRP. The committee comprises all financial creditors of the company.
- Appointment of Resolution Professional: The first meeting of the COC must be held within 7 days of its constitution and decide by 75% of votes, either to replace or confirm interim insolvency professional as Resolution Professional for the remainder of the CIRP term. It completely rests in the hands of COC, and with a majority of 75% votes, it can change the Resolution Professional any time.
- Approval of the Resolution Plan: A resolution plan for the revival of the insolvent company must be approved within 180 days from the start of the CIRP by creditors. Any person, management, the creditors, or a third party can propose such a plan. It is the responsibility of the resolution professional to verify that the plan meets the criteria set out in the IBC. Although, the Resolution Professional cannot propose this plan.
- If a plan is approved within this period and is sanctioned by the NCLT, it becomes binding on all people involved in the CIRP.
- If no resolution plan is approved in this period, the NCLT orders the liquidation of the corporate debtor. After the approval of liquidation, COC appoints the liquidator to dispose-off the assets of the corporate debtor and distribute the amount among the stakeholders respectively in accordance with Section 53 of the IBC, 2016.
LetsComply‘s corporate law experts can help you with filing of a Corporate Insolvency Resolution application with the NCLT and represent your interest as a creditor against a corporate debtor like a builder. To know more, call us at +91-9717070500 or send an email at firstname.lastname@example.org.