This article was written and edited by the team at Anoop & Co. – AOR Anoop Prakash Awasthi, Adv. Parthvi Ahuja and Ananya Singh.
Insolvency is a state of being unable to pay the debts owed by a person or a company. It is the situation in which the assets of the company are not sufficient enough to discharge the debts and liabilities incurred by the person or company. The person or the company is termed as an insolvent.
The Corporate Insolvency Resolution Process (‘CIRP’) is a recovery mechanism for the creditors of a corporate debtor. A corporate debtor means a company or Limited Liability Partnership (‘LLP’) that owes a debt to its creditors.
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) lays down the provisions for conducting insolvency or bankruptcy of individuals, partnership firms, LLP and companies. However, the process of insolvency and liquidation of corporate debtors under the IBC applies where the minimum default amount is Rs.1 crore only.
The Insolvency and Bankruptcy Code, 2016 (Code) is the Act which lays down the statutory provisions for the Corporate Insolvency Resolution Process as well as other guidelines necessary for the Corporate Insolvent.
Along with the Code, Insolvency and Bankruptcy Board of India (Board) was also established on 1st October, 2016 which lays down certain rules, regulations and provisions for the matters under the Code and acts as a regulator of the insolvency proceedings.
The Adjudicating Authority for the matters under the Code is National Company Law Tribunal (NCLT) constituted under Section 408 of the Companies Act, 2013. The NCLT that will adjudicate upon the matters of any Company will be decided based on where the registered office of the Company is situated. In a case where the decision given by the NCLT is not satisfactory for an Applicant, he can approach the National Company Law Appellate Tribunal, New Delhi (NCLAT)under Section 410 of the Companies Act, 2013 and can challenge such a decision of the NCLT.
In a case where an applicant is aggrieved by the order passed by the NCLAT, he can approach the Supreme Court of India under Section 62 of the Code.
Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism for creditors. If a corporation becomes insolvent, a financial creditor, an operational creditor, or the corporate itself may initiate CIRP.
Financial Creditor could be any person to whom a business debt is owed or a person to whom such amount is legally assigned or transmitted. For example, Banks or other financial institutions
In other words, a financial creditor is a person to whom the business owes a financial debt and includes a person to whom such debt is legally transmitted or assigned. A financial debt means a debt along with interest disbursed against the consideration for the value of money and includes:
- The amount borrowed against the payment of interest.
- The amount raised by acceptance under the acceptance credit facility or its dematerialised equivalent.
- The amount raised under the note purchase facility or the issue of notes, bonds, loan stock, debentures or any other similar instrument.
- The amount of the liability relating to a lease or hire purchase contract that is deemed as capital or finance lease under the Indian Accounting Standards or such other accounting standards.
- Receivables discounted or sold other than the receivables sold on a non-recourse basis.
- The amount raised under any other transaction, including any purchase agreement or forward sale having the commercial effect of a borrowing.
- Any derivative transaction entered in connection with benefit from or protection against fluctuation in any price or rate.
- Any counter-indemnity obligation relating to a bond, indemnity, guarantee, documentary letter of credit or other instrument issued by a financial institution or bank.
- The amount of liability relating to any of the indemnity or guarantee for any of the points mentioned above.
Operational Creditor could be any person to whom an operational debt is owed and includes any person to whom such amount has been legally assigned or transferred for goods or services done by them. For example, vendors and suppliers, employees, government etc.
In simpler terms, an operational creditor is a person to whom the business owes an operational debt and includes persons to whom such amount has been legally transferred or assigned for services or goods given by them.
An operational debt means a claim relating to the provision of services or goods, including debt or employment regarding payment of dues arising under any law in force and payable to the Central Government, State Government or local authority
The Insolvency and Bankruptcy Code, 2016 provides a provision for an application for insolvency or bankruptcy of start-ups, individuals, partnership firms, limited liability partnerships, and companies. The Code has provided a slab of default amount in each category however the final amount is to be notified by the Government as the trigger point to initiate the proceeding while keeping in view the fluctuation of the economy. It is important to understand that the said amount is not the minimum or maximum fixed amount of debt default but it is a ‘range’.
The financial creditor can initiate the CIRP against the corporate debtor by applying to NCLT. The operational creditor should first give a demand notice of an unpaid invoice to the corporate debtor demanding the default payment amount. When the operational creditor does not receive payment from the corporate debtor after the expiry of ten days of delivery of the demand notice or invoice demanding payment, he can apply to NCLT for initiating the CIRP.
A partner or member of the corporate debtor authorised to initiate CIRP or a person in charge of managing the affairs or who has control and supervision over the financial affairs of the corporate debtor can initiate the CIRP with NCLT.
NCLT will pass an order within fourteen days of either admitting or denying the CIRP application. The CIRP will commence from the admission date of the application by NCLT. The CIRP completion period is 180 days from the admission date of the CIRP application.
CIRP is the process through which it is determined whether the person who has defaulted is capable of repayment or not. If a person is not capable of repaying the debt the company is restructured or liquidated.
Thus, it can be inferred that the Corporate Insolvency Resolution Process is a detailed process. There are various steps to be followed during the process for a desirable outcome from it. The provisions and regulations which provide the essential requirements and stipulated time frames for all the stages in the CIRP are important to be adhered to. Any delay and diversions from the stages will have an adverse effect on the CIRP. If the CIRP is conducted in a manner as prescribed by the Code and its regulations, it will result in the revival and reconstruction of the Corporate Debtor.
