OPERATIONAL CREDITOR
PROCESS–
OPERATIONAL CREDITOR
SHORT
SUMMARY
In this Flash editorial, the author begins by
referring the provisiosn of Insolvency & Bankruptcy Code, 2016. Since the code come into effect from December
2016 all the applicants/ creditors have begun to file applications under the
Code. The
main thrust of the article, however, is upon the “provisions
/ process of initiation of Insolvency Resolution Process against the Corporate
Debtor by Operational Creditor.”
This is article no. 231 of the series of editorials
written by the author on corporate laws
{Including Companies Act, 2013,
SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
INTRODUCTION:
Earlier only secured financial
creditors (creditors holding collateral against loans), can file an application
for declaring a company sick. Under this code operational creditors, such as
employees whose salaries are due, seller of Goods & Services etc be allowed
to initiate the insolvency resolution process (IRP).
WHO
CAN FILE APPLICATION?
As per Insolvency and Bankruptcy Code 2016,
Corporate Insolvency Resolution process can be initiated by;
Ø Financial
Creditor
Ø Operational Creditor and
Ø Corporate
Debtor
OPERATIONAL
CREDITOR MEANS;
·
A person to whom an operational
debt is owed and
·
Any person to whom such debt has been legally assigned or transferred
Operational debt has been defined by section
5(21) of IBC and it must fulfill following substantive elements namely:
(a) Debt arising out of
professional goods; or
(b) Services: or
(c) Out of Employment.
(d) It also covers dues arising
under any law for the time being in force and payable
to the Central or State Government or
local authority.
HOW TO INITIATE PROCESS BY
OPERATIONAL CREDITOR?
Step – 1:
Default by Corporate Debtor
As stated in section 6 of IBC, Creditors may act for
initiation of insolvency resolution process against corporate debtor only in
the situation where Corporate Debtor commits a default.
Default: means non-payment of debt when whole or any
part or installment of the amount of debt has become due and payable and is not
repaid by the debtor or the corporate debtor, as the case may be.
Step –2:
Default Notice on Occurrence of Default
Section
8 (1) states that 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
prescribed forms (Form- 3 & Form 4).
Step –3: Respond by Corporate Debtors
Corporate debtor has to respond the demand notice
within 10 days. Corporate can bring into notice of operational creditors
existence of any dispute, proof of repayment of debt if any.
Step –4: Application to NCLT
If the Operational creditor doesn’t not receive the
payment or any notice of dispute from the corporate debtor within 10 days of
issue of demand notice, then OC can file the application with NCLT.
Information / documents required to be submitted along
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 and such other information
as may be specified;
(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.
Step –5: Decision of NCLT – Admission/ Rejection of Case
The NCLT shall within fourteen days
of the receipt of the application, ascertain the existence of default from the
records of information utilities or on the basis of evidence furnished by the operational
creditor. NCLT can admit application or reject application.
Grounds of Rejection of Application:
§
There has been repayment of the
unpaid operational debt ;
§
the creditor has not delivered the invoice or
notice for payment to the corporate debtor ;
§
Notice of dispute has been received
by the operational creditor or there is a record of dispute in the information
utility ; or
§
Any disciplinary proceeding is
pending against any proposed resolution professional
Notice by NCLT to OC/ CD:
In case of admission / rejection of
application by NCLT, it shall communicate the decision to the operational
creditor and corporate debtor.
Process after
admission of application by NCLT
Step –6: Commencement of Insolvency Resolution Process
The Corporate insolvency resolution
process shall commence from the date of admission of the application by NCLT.
Step –7: NCLT shall order:
A. Moratorium
Order
On the insolvency commencement date,
the Adjudicating Authority shall by order declare moratorium. The motivation
behind the moratorium is that it is value maximizing for the entity to continue
operations even as viability is being assessed during the Insolvency resolution
process (IRP).
The NCLT shall by order prohibit the
following namely:
1.
The institution of suits or continuation of pending suits or proceedings against
the corporate debtor including execution of any judgment, decree or order in
any court of law, tribunal, arbitration panel or other authority.
2.
Transferring, encumbering, alienating or disposing of by the corporate debtor
any of its assets or any legal right or beneficial interest therein.
3.
Any action to foreclose, recover or enforce any security interest created by
the corporate debtor in respect of its property including any action under the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002,
4.
The recovery of any property by an owner or lessor where such property is
occupied by or in the possession of the corporate debtor.
The order of moratorium shall have
effect from the date of admission of application process and shall cease to
have effect from the date of approval of resolution plan or liquidation order,
as the case may be.
B. Appointment
of Insolvency Resolution Professional
While filing of application with
NCLT in step 4 Operational creditor may propose an interim resolution professional.
If not proposal made by operational creditor, the Adjudicating Authority shall
make a reference to the Board for the recommendation of an insolvency
professional who may act as an interim resolution professional. The Board
shall, within ten days of the receipt of a reference from the Adjudicating
Authority shall recommend the name of an insolvency professional.
The
NCLT shall appoint an interim resolution professional at the start of the Insolvency
resolution process i.e within fourteen days from the insolvency commencement
date, if no disciplinary proceedings are pending against him. The term of shall
not exceed 30 days from the date of his appointment.
C. Cause
Public Notice:
NCLT Cause a public announcement of
the initiation of corporate insolvency resolution process and call for the
submission of claims. The public announcement shall be made immediately after
the appointment of the interim resolution professional.
The Public announcement shall
contain the following information, namely:-
(a)
name and address of the corporate debtor under the process, name of the
authority with which the corporate debtor is incorporated or registered,
(b)
the last date for submission of claims,
(c)
details of the interim resolution professional who shall be vested with the management
of the corporate debtor and be responsible for receiving claims,
(d)
penalties for false or misleading claims and
(e)
the date on which the corporate insolvency resolution process shall close, which
shall be the one hundred and eightieth day from the date of the admission of
the application, as the case may be.
Step –8: Duties of Insolvency resolution professional (IRP):
As stated in section 18 IRP have
several duties, some are mentioned below:
§ Collect
all information relating to the assets, finances and operations of the
corporate debtor for determining the financial position of the corporate debtor.
§ The
IRP shall receive and collate all the claims submitted by creditors to him,
pursuant to the public announcement.
§ Constitute
a committee of creditors
Step –9: Committee of Creditors:
The
interim resolution professional shall after collation of all claims received
against the corporate debtor and determination of the financial position of the
corporate debtor, constitute a committee of creditors. The committee of
creditors shall comprise all financial creditors of the corporate debtor. All
decisions of the committee of creditors shall be taken by a vote of not less
than seventy-five per cent. of voting share of the financial creditors.
The
first meeting of the committee of creditors shall be held within seven days of
the constitution of the committee of creditors. Members of the committee may
meet in person or by such electronic means as may be specified. Resolution
professional shall conduct all the meetings, including giving notices of each
meeting to members of Committee of creditors, members of the suspended Board of
Directors or the partners of the corporate persons, as the case may be.
Step –10: Preparation & approval of Resolution plan by IRP:
Resolution
professional shall prepare an information memorandum for formulating resolution
plan. A resolution applicant may submit a resolution plan to the resolution professional
prepared on the basis of the information memorandum. The resolution
professional shall examine each resolution plan received by him.
The
resolution professional shall present to the committee of creditors for its approval
such resolution plans. The Committee of creditors may approve a resolution plan
by a vote of not less than seventy five percent of voting share of the
financial creditors.
The
resolution professional shall submit the resolution plan as approved by the
committee of creditors to the Adjudicating Authority.
Step –11: Submission of resolution plan to NCLT:
If
the Adjudicating Authority is satisfied that the resolution plan as approved by
the committee of creditors under sub-section (4) of section 30 meets the requirements
as referred to in sub-section (2) of section 30, it shall by order approve the
resolution plan.
Binding: It
shall be binding on corporate debtor, its employees, members, creditors, guarantors
and other stakeholders involved in resolution plan.
Where
the Adjudicating Authority is satisfied that the resolution plan does not confirm
to the requirements referred to in sub-section (1), it may, by an order, reject
the resolution plan
Step –12: Effect of Order of NCLT:
§ The
moratorium order passed by the Adjudicating Authority shall cease to have
effect.
§ The resolution
professional shall forward all records relating to the conduct of the corporate
insolvency resolution process and the resolution plan to the Board to be recorded
on its database
Step –13: Appeal
Any
appeal from an order approving the resolution plan shall be in the manner and
on the grounds laid down in sub-section (3) of section 61.
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer:
The
entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such
information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION
WITH THE USE OF THE INFORMATION.
[1]
The NCLT shall, before rejecting the
application give notice to the applicant to rectify the defect in his application
within seven days of receipt of such notice
can you tell , what happens if a IRP''s appointment is irregular? as in there was appointment of IRP, than he did some work related to that insolvency proceedings but later the IRP elected was found wrongly elected and a new IRP was confirmed. In that case would all the work done by the previous IRP get cancelled out or would the new IRP begin its work with continuance of already related work done? what would be the consequence of irregular appointment of IRP?
ReplyDeleteIs the demand notice to be sent to the registered office (no one present,Delhi) or corporate office (Bangalore)
ReplyDeleteIf company is already preparing for filing, what should be done by employees to get 3-4 months unpaid salary, PF and other settlement and compensation for existing active employees.
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