Process of Corporate Insolvency Resolution Process

Process of Corporate Insolvency Resolution Process

This code empowers all classes of creditors (secured and unsecured lenders, employees, trade creditors, regulatory authorities) to trigger a resolution process in case of non-payment of valid claim.

The Insolvency Code provides a speedy process for insolvency resolution and liquidation for companies and other limited liability entities. The process is expected to ensure early identification of distressed assets and possibility of revival of such assets.

It prescribes an insolvency resolution process with a strict timeline of 180 days with one time extension of 90 days (“Resolution Period”). During the insolvency resolution process, the creditors and debtor are required to discuss and deliberate on viability of the business of the debtor. The creditors and the debtor will come up with the restructuring / resolution plan during the Resolution Period if the business is found to be viable

Corporate Insolvency Resolution process deals with matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is

one lakh rupees:

ORIGIN AND OBJECT OF INSOLVENCY LAWS:

The principal focus of modern insolvency legislation and business debt restructuring practices is not the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business. In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent. In others (like the United States with its Chapter 11 provisions), the business.

Ultimately the basic objective of insolvency laws is the distribution of the effects of a debtor in the most expeditious, equal and economical mode and liberation of his person from the demands of his creditors when he has made a full surrender of his property.

In the case of Yenamulla Malludora vs P.Seetharatnam (AIR 1966 SC 918), Supreme Court of India observed, ‘The object of the law of insolvency is to seize the property of an insolvent before he can squander it and to distribute it amongst his creditors. It is however not every debtor who has borrowed beyond his assets or even one whose property is attached in execution of his debts, who can be subjected to such control. The jurisdiction of the Court commences when certain acts take place which are known as acts of insolvency and which give a right to his creditor to apply to the Court for his adjudication as an investment.

Meaning of ‘Corporate Terminologies’

(7) "Corporate Person" 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.

(8) "Corporate Debtor" means a corporate person who owes a debt to any person.

(10) "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;

Section 5

(1) "Adjudicating Authority" National Company Law Tribunal (NCLT) constituted under section 408 of the Companies Act, 2013.

(7) " Financial Creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to

(20) "Operational Creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

CORPORATE INSOLVENCY RESOLUTION PROCESS:

Lets discuss the process of Corporate Insolvency Resolution Process step vise step along with detailed provisions. Let’s first discuss the chart of Insolvency Resolution Process.

Time Bound Insolvency Resolution Process:

Step Wise Process of ‘Corporate Insolvency Resolution Process’:

v  Who can initiate corporate insolvency resolution process?

If any corporate debtor commits a default following person may initiate corporate insolvency resolution process in respect of such corporate debtor.

§  A Financial Creditor, or;

§  An operational Creditor, or;

§  The Corporate debtor itself

 v Who can’t initiate corporate insolvency resolution process in Chapter II?

§  a corporate debtor undergoing a corporate insolvency resolution process; or

§  a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or

§  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

§  a corporate debtor in respect of whom a liquidation order has been made.

Provision for Initiation of Process by “FINANCIAL CREDITOR”

_{Chapter II}

a)     To whom [1]financial creditor will file application for initiation of process?

They will file application with Adjudicating authority. For Corporate Insolvency adjudicating authority is National Company Law Tribunal.

b)     What are the documents required to submit with application?

              i.      Record of the default recorded with the information utility or such other record or evidence of default as may be specified.

           ii.      The name of the ‘Resolution professional’ proposed to act as an interim resolution professional

         iii.      Any other information as may be specified by the Board.

c)     What is the time period Adjudication authority has to accept or reject the application?

The AA shall within 14 days of the receipt of the application accept or reject the application.

d)     What will be the basis of acceptance or rejection of application?

The AA ascertains the existence of a default from the records of an information utility OR on the basis of other evidence furnished by the financial creditor. After this AA will decide to accept or reject the application:

Accept: a default has occurred and the application by creditor is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application;

Reject: Default has not occurred or the application by creditor is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application

e)     Time period for communication of acceptance/rejection of application by AA to creditors?

The AA will communicate the same within 7 days of admission or rejection of such application.

f)      Whether there will be any opportunity for ratification of default of application?

AA before rejecting application gives notice to the applicant for rectification of defect in his application within 7 days of receipt of such notice from the AA.

g)     Date of commencement of process of corporate insolvency process?

The process will commence from the date of admission of application by AA.

Provision for Initiation of Process by “OPERATIIONAL CREDITOR”

Notice to the Corporate Debtor:

An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

Step of the Corporate Debtor against notice of Creditor:

a)     Time Period in which corporate debtor reverts to the Creditor?

Within a period of 10 (Ten) days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor.

b)     Ways of revert to the Creditor by Corporate Debtor?

     i.      Debtor will inform existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;   OR

  ii.      the repayment of unpaid operational debt—

§ by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or

§ by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor

c)     When Creditor can initiate corporate insolvency resolution process?

If Creditor doesn’t received anything below mentioned form the Corporate Debtor within 10 days of from the date of delivery of notice then creditor can file application for initiating a corporate insolvency resolution process.

§  Payment

§  Notice of dispute as mentioned above

d)    What are the documents required to submit with application?

     i.      a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

  ii.      an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

iii.      a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and

 iv.      such other information as may be specified.

   v.      They will propose the name of “resolution professional” to act as an interim resolution professional.

e)     What is the time period Adjudication authority has to accept or reject the application?

The AA shall within 14 days of the receipt of the application accept or reject the application.

h)     What will be the basis of acceptance or rejection of application?

The AA will decide to accept or reject the application on the following basis:

Accept:  The AA admit the application and communicate such decision to the operational

creditor and the corporate debtor if,—

§ the application made under sub-section (2) is complete;

§ there is 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 by the operational creditor or there is no record of dispute in the information utility; and

§ there is no disciplinary proceeding pending against any resolution professional propose.

Reject:  The AA reject the application and communicate such decision to the operational

creditor and the corporate debtor, if—

o The application made under sub-section (2) is incomplete;

o There has been repayment of the unpaid operational debt;

o The creditor has not delivered the invoice or notice for payment to the corporate debtor;

o Notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

o Any disciplinary proceeding is pending against any proposed resolution professional.

i)       Time period for communication of acceptance/rejection of application by AA to creditors?

The AA will communicate the same within 7 days of admission or rejection of such application.

j)       Whether there will be any opportunity for ratification of default of application?

AA before rejecting application gives notice to the applicant for rectification of defect in his application within 7 days of receipt of such notice from the AA.

k)     Date of commencement of process of corporate insolvency process?

The process will commence from the date of admission of application by AA.

Provision for Initiation of Process by “CORPORATE APPLICANT”

a)     Who can initiate corporate insolvency resolution process?

A Corporate applicant may file an application for initiating corporate insolvency resolution process with the AA.

b)     What are the documents required to submit with application?

        i.      its books of account and such other documents relating to such period as may be specified; and

     ii.      the resolution professional proposed to be appointed as an interim resolution professional.

c)     What is the time period Adjudication authority has to accept or reject the application?

The AA shall within 14 days of the receipt of the application accept or reject the application.

d)    Time period for communication of acceptance/rejection of application by AA to creditors?

The AA will communicate the same within 7 days of admission or rejection of such application.

e)     Date of commencement of process of corporate insolvency process?

The process will commence from the date of admission of application by AA.

________*___________*____________________*______________*__________*_______

A.     What is the time limit for completion of Insolvency resolution process?

The Corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of application (commencement of process).

B.      Whether time limit for completion of Insolvency resolution process can be increased further?

§  If creditor instruct the resolution professional by passing of resolution with the majority of 75% in the committee of creditor.

§  Then resolution professional shall file a application with the adjudicating authority.

§  If the AA is satisfied with the application, it may by order extend the duration of such process beyond 180 days by such further period as it think fit, but not exceeding 90 days.

C.      Steps to be taken by AA after admission of application?

§  Declare a moratorium for the purposes referred to in section 14;

§  Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and

§   Appoint an interim resolution professional in the manner as laid down in section 16.

Further I will discuss in my next article about Moratorium, Public Announcement and Interim Resolution Professional.

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[1] A default include a default in respect of a financial debt owned not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.