Corporate Insolvency Resolution Process, Liquidation and Winding Up

Corporate Insolvency Resolution Process, Liquidation and Winding Up

Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) consolidates and amends the laws relating to insolvency of companies, partnership firms, limited liability partnership, individuals into a single legislation. It aims to provide time bound resolution and empowers the creditors to initiate the insolvency resolution process, if default occurs.

In this new Code, a company which has become insolvent cannot start the Liquidation process at the primary stage until and unless it has gone through the process of Corporate Insolvency Resolution Process (CIRP).

Under the said resolution process, options for revival of the company are looked into and if the said resolution process fails, only then the company goes into liquidation.

The Corporate Insolvency Resolution Process (CIRP) can be initiated by making an application to the NCLT

  • by the Financial Creditors under Section 7,
  • by Operational Creditors under Section 9, and
  • by the Corporate Debtor under Section 10

The Insolvency and Bankruptcy Board of India (“IBBI”), is the regulatory body under IBC.

Chapter XX of the Companies Act, 2013 regulates the winding-up of companies in India. By virtue of Section 255 of IBC 2016, the Companies Act, 2013 stands amended in accordance with Schedule XI of the Code.

Difference between “Insolvency” and “Bankruptcy”

Insolvency and bankruptcy are not synonymous.
Insolvency (kangaal)
The term “insolvency” denotes the state of one whose assets are insufficient to pay his debts; or his general inability to pay his debts. The term “insolvency” is used in a restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business. The term insolvency is used for individuals as well as organisations/corporates.
Bankruptcy (diwaliya)
The word “bankruptcy” denotes a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated and used to pay the creditors in accordance with law.
The term bankruptcy is used for individuals whereas liquidation is used for corporates.

Liquidation means closure or winding-up of a corporation or an incorporated entity through legal process on account of its inability to meet its obligations or to pay its debts.
Conclusion

  • While insolvency is the inability of debtors to repay their debts, the bankruptcy, on the other hand, is a formal declaration of insolvency in accordance with law of the land. Insolvency describes a situation where the debtor is unable to meet his/her obligations and bankruptcy occurs when a court determines insolvency, and gives legal orders for it to be resolved.
  • Thus insolvency is a state and bankruptcy is the conclusion.
  • If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

The Insolvency and Bankruptcy Code, 2016

History

  • The Insolvency and Bankruptcy Code Bill was drafted by a specially constituted “Bankruptcy Law Reforms Committee” (BLRC) under the Ministry of Finance.
  • The Code was introduced in the Lok Sabha on 21st December, 2015 and was subsequently referred to a Joint Committee of Parliament.
  • The Committee submitted its recommendations and the modified Code was passed by Lok Sabha on 5th May, 2016.
  • The Code was passed by Rajya Sabha on 11th May, 2016 and it received the Presidential assent on 28th May, 2016.

The Code has an overriding effect over other enactments

  • The question of overriding effect was first in question in the case of ‘M/s. Innoventive Industries Ltd. vs. ICICI Bank’ which is the very first case in the Code itself. It was held by Supreme Court that IBC shall prevail over Maharashtra Relief Undertaking (Special Provisions Act) 1958.
  • In another case of ‘Pr. Commissioner of Income Tax vs Monnet Ispat and Energy Ltd.’, Supreme Court confirmed that Insolvency and Bankruptcy Code, 2016 will override anything inconsistent contained in any other enactment, including the income tax act.

Applicability of Insolvency and Bankruptcy Code
Section 2 of the Insolvency and Bankruptcy Code, 2016 provides that the provisions of the Code shall apply to –

  • any company incorporated under the Companies Act, 2013 or under any previous company law,
  • any other company governed by any special Act for the time being in force,
  • any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008,
  • such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf,
  • personal guarantors to corporate debtors,
  • partnership firms and proprietorship firms; and
  • individuals (other than persons referred to in clause (e)) in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

Structure of the Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 consists of total 255 sections organised in five Parts.

  • Part I deals with the introduction, application and definitions of the Code,
  • Part II deals with insolvency resolution and liquidation for corporate persons
  • Part III lays down procedure for insolvency resolution and bankruptcy for individuals and partnership firms.
  • Part IV of the Code makes provisions for regulation of Insolvency Professionals, Agencies and Information Utilities
  • Part V includes provisions for miscellaneous matters.

The Code also has 11 Schedules which amends various statutes. and 12th schedule lists the Acts for the purpose of section 29A (d) of the Code.

Some Salient Features of the Insolvency and Bankruptcy Code, 2016

  1. To ensure a formal and time bound insolvency resolution process, the Code creates a new institutional framework consisting of the Insolvency and Bankruptcy Board of India (IBBI), Adjudicating Authorities (AAs), Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (IUs).
  2. Insolvency Professionals
    • The Insolvency Professionals control the assets of the debtor during the insolvency resolution process.
    • The insolvency professional verifies the claims of the creditors, constitutes the committee of creditors, runs the debtor’s business during the moratorium period and assists the creditors in finalising the revival plan.
    • In liquidation, the insolvency professional acts as a liquidator, and assist in the insolvency resolution proceedings
    • The Insolvency and Bankruptcy Board of India has framed the IBBI (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals.
  3. Information Utilities(IU)
    • IU are entities which are registered with IBBI under Section 210 of Insolvency and Bankruptcy Code (IBC) as per the eligibility criteria, act as data repositories of financial information which receive, authenticate, maintain and deliver financial information pertaining to a debtor with a view to facilitate the insolvency resolution process in a time bound manner.
    • Access of the same (information) is made available to the Resolution Professionals, Creditors and other stakeholders in the Insolvency Resolution Process so that all stakeholders can make decisions based on the same information.
    • The Insolvency and Bankruptcy Board of India has framed the IBBI (Information Utilities) Regulations, 2017.
  4. Adjudication Authorities
    1. The Code proposes 2 Tribunals to adjudicate insolvency resolution cases.
      • In the case of insolvency of companies and Limited Liability Partnerships (LLPs), the adjudication authority is the National Company Law Tribunal (NCLT)
      • The cases involving individuals and partnership firms are handled by the Debts Recovery Tribunals (DRTs).
    2. Appeals from NCLT orders lie with National Company Law Appellate Tribunal (NCLAT) and thereafter with the Supreme Court of India. Similarly, appeals from DRT orders lie with Debt Recovery Appellate Tribunal (DRAT) and thereafter with the Supreme Court of India.
  5. Stages in resolution process
    In resolution process for corporate persons, the Code proposes two independent stages
    • Insolvency Resolution Process, during which the creditors assess the viability of debtor’s business and the options for its rescue and revival.
    • Liquidation, in case the insolvency resolution process fails or financial creditors decide to wind-up and distribute the assets of the debtor.
  6. Who can initiate Corporate Insolvency Resolution Process (CIRP)
    • A financial creditor (for a defaulted financial debt) or
    • An operational creditor (for an unpaid operational debt)
    • Defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings.

IMPORTANT RULES AND REGULATIONS

  • Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016
  • Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016
  • Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016
  • Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
  • Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
  • Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016
  • Insolvency and Bankruptcy board of India (Voluntary Liquidation Process) Regulations, 2017
  • Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017

Part II of Insolvency and Bankruptcy Code, 2016

Part II of Insolvency and Bankruptcy Code, 2016 shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees.

IMPORTANT DEFINITIONS

  • Adjudicating Authority”, for the purposes of Part II, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013
  • Corporate applicant” means –
    • corporate debtor; or
    • a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process or the pre-packaged insolvency resolution process, as the case may be, under the constitutional document of the corporate debtor; or
    • an individual who is in charge of managing the operations and resources of the corporate debtor; or
    • a person who has the control and supervision over the financial affairs of the corporate debtor;
  • Corporate debtor” means a corporate person who owes a debt to any person.
  • 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.
  • Corporate Guarantor” means a corporate person who is the surety in a contract of guarantee to a corporate debtor.
  • Default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.
  • 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.
  • Financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes –
    1. money borrowed against the payment of interest;
    2. any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
    3. any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
    4. the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
    5. receivables sold or discounted other than any receivables sold on non-recourse basis;
    6. any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
      Explanation: for the purpose of this sub-clause:
      • any amount raised from an allottee under real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
      • the expressions, “ allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses(d) and (zb) of Section 2 of Real Estate (Regulation and Development) Act, 2016.
    7. any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
    8. any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
    9. the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;
  • Initiation date” means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process or pre-packaged insolvency resolution process, as the case may be.
  • Insolvency professional” means a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207.
  • Insolvency professional agency” means any person registered with the Board under section 201 as an insolvency professional agency.
  • Insolvency resolution process costs” means –
    • the amount of any interim finance and the costs incurred in raising such finance;
    • the fees payable to any person acting as a resolution professional;
    • any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;
    • any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and
    • any other costs as may be specified by the Board
  • Resolution professional”, for the purposes of Part II, means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.
  • Insolvency commencement date” means the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authorityunder sections 7, 9 or section 10, as the case may be:
    Provided that where the interim resolution professional is not appointed in the order admitting application under section 7, 9 or 10, the insolvency commencement date shall be the date on which such interim resolution professional is appointed by the Adjudicating Authority;

RESOLUTION PROCESS

Initiation of CIRP by financial creditor under Section 7 of the Code

  1. Who may initiate CIRP
    A financial creditor either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor (as may be notified by Central Government) may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
    With regard to financial debt in the form of securities or deposits wherein the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors
  • such trustee or agent shall act on behalf of such financial creditors

    Where a financial debt is owed to a class of creditors exceeding the number as may be specified

  • an application for initiation corporate insolvency resolution process against the corporate debtor shall be filed jointly by

    • not less than 100 of such creditors in the same class or
    • not less than 10% of the total number of such creditors in the same class,
      whichever is less.
  • In the case of financial creditors who are allottees under a real estate project,
    an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by
      • not less than 100 of such allottees under the same real estate project or
      • not less than 10% of the total number of such allottees under the same real estate project,
        whichever is less.

        A default herein includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

  1. Documents to be submitted
    The financial creditor shall, along with the application furnish –
    • record of the default recorded with the information utility or such other record or evidence of default as may be specified;
    • the name of the resolution professional proposed to act as an interim resolution professional; and
    • any other information as may be specified by the Board.
  2. Ascertainment of existence of a default by Adjudicating Authority
    The Adjudicating Authority shall, within 14 days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor. If the said Authority has not ascertained the existence of default and passed any such order within such time, it shall record its reason in writing for the same.
  3. Where the Adjudicating Authority is satisfied that –
    •   a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or
    • default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application.
      However, before rejecting the application, the Adjudicating Authority shall give a notice to the applicant to rectify the defect in his application within 7 days of receipt of such notice.
  4. The corporate insolvency resolution process shall commence from the date of admission of the application.
  5. The Adjudicating Authority shall communicate the order to the financial creditors and the corporate debtor within 7 days of admission or rejection of such application, as the case may be.

Insolvency Resolution by operational creditor [Section 8]

  1. An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debt with 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.
  2. The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor
    • existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
    • the payment 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.
        A “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

Application for initiation of corporate insolvency resolution process by operational creditor [Section 9]

  1. After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
  2. The operational creditor shall attach, along with the application furnish-
    • a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
    •  an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
    • 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, if available;
    • a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
    • any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.
  3. An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
  4. The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order–
    1. admit the application and communicate such decision to the operational creditor and the corporate debtor if, –
      • the application is complete;
      • there is no payment 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 proposed, if any.
    2. reject the application and communicate such decision to the operational creditor and the corporate debtor, if –
      • the application is incomplete;
      • there has been payment 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:

Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within 7 days of the date of receipt of such notice from the Adjudicating Authority.

5. The corporate insolvency resolution process shall commence from the date of admission of the application under this section.

Initiation of CIRP by the corporate debtor itself under Section 10 of the Code

  1. Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
  2. The corporate applicant shall, along with the application, furnish-
    • the information relating to its books of account and such other documents for such period as may be specified;
    • the information relating to the resolution proposed to be appointed as an interim resolution professional; and
    • the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least 3/4th of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

SUSPENSION OF INITIATION OF CIRP"(Sec 10A)

No application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of 6 months or such further period, not exceeding 1 year from such date, as may be notified in this behalf. Moreover, the said provision shall not apply to any default committed under the said sections before 25th March, 2020.

The above stated provision was inserted vide Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 in light of COVID-19 pandemic that has impacted business, financial markets and economy all over the world, including India, and created uncertainty and stress for business for reasons beyond their control.

The nationwide lockdown since 25th March, 2020 to combat the spread of COVID-19 had added disruption of normal business operations and hence, it would be difficult to find adequate number of resolution applicants to rescue the corporate person that has defaulted in its payments.

Later on the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 was passed repealing the said Ordinance and inserting section 10A in the Code, which ensures that fresh insolvency proceedings will not be initiated against a company starting March 25, 2020.

The period was for six months pursuant to the Ordinance and the amendment empowered the Government of India to extend this suspension for a maximum period of one year. The operation of Section 10A of IBC was extended for three months, upon the expiry of statutory period of six months in September 2020, till December 2020 and for further three months in December 2020, till March 2021, thereby enforcing the suspension of Sections 7, 9 and 10 of IBC for one whole year.

TIME LIMIT OF CORPORATE INSOLVENCY RESOLUTION PROCESS

The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process. The resolution professional may file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 66% of the voting shares.

If the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within 180 days, it may by order extend the duration of such process beyond 180 days by such further period as it thinks fit, but not exceeding 90 days.

However, corporate insolvency resolution process shall be mandatorily completed within a period of 330 days from the insolvency commencement date including any extension of the period of CIRP granted under section 12 and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

Withdrawal of Application
The Adjudicating Authority may allow the withdrawal of application admitted on an application made by the applicant with the approval of 90% voting share of the committee of creditors in the prescribed manner.

MORATORIUM [a waiting period set by an authority/ a suspension of activity]

On commencement of the CIRP, the adjudicating authority passes an order declaring moratorium for prohibiting all of the following by virtue of section 14 of the IBC:

  •  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;
  • Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under SARFAESI Act, 2002;
  • 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 supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

The order of moratorium shall have effect from the date of order of initiation of CIRP till the completion of CIRP or date of approval of resolution plan or order of liquidation by the adjudicating authority, as the case may be.

Non-applicability of provisions of moratorium
Notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period.

Further, where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances.

Also, the provisions of moratorium are not applicable to :

  • such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
  • a surety in a contract of guarantee to a corporate debtor.

PUBLIC ANNOUNCEMENT OF CORPORATE INSOLVENCY RESOLUTION PROCESS
Section 15 of the Code makes it mandatory for IRP to make the public announcement of the corporate insolvency resolution process admitted by AA which shall contain the following information, namely: –

  • name and address of the corporate debtor under the corporate insolvency resolution process;
  • name of the authority with which the corporate debtor is incorporated or registered;
  • the last date for submission of claims, as may be specified;
  • details of the interim resolution professional who shall be vested with the management of the corporate debtor and be responsible for receiving claims;
  • penalties for false or misleading claims; and
  • 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 under sections 7, 9 or section 10, as the case may be.

INTERIM RESOLUTION PROFESSIONAL (IRP)

The IRP takes over the management of the corporate debtor and is in charge of day-to-day affairs of the corporate debtor. The powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the IRP. He may appoint professionals and consultants to support him in his duties. The IRP is responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

The primary duties of the IRP are to:

  • Make public announcement about the CIRP of the corporate debtor
  • Invite claims from creditors
  • Get valuation of the corporate debtor done

On receipt of claims from the creditors, the IRP shall verify the claims and make list of accepted claims. Within 30 days of commencement of CIRP, the IRP shall constitute a Committee of Creditors (COC) which primarily consists of all financial creditors of the corporate debtor. The IRP shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

RESOLUTION PROFESSIONAL

The Resolution Professional (RP) is a new category of professionals who on meeting stipulated criteria, is registered with the Insolvency and Bankruptcy Board of India. Only a person who is registered as a Resolution Professional / Insolvency Professional can act as such. Company Secretaries are eligible to be registered as Resolution Professionals subject to meeting stipulated criteria. The resolution professional shall exercise powers and perform duties as are vested or conferred on the IRP under the Code. The RP is appointed in the first meeting of the Committee of Creditors by a majority vote of not less than 66% of voting share of the financial creditors, either resolving to appoint the IRP as a RP or to replace the IRP by another RP.

COMMITTEE OF CREDITORS

The Committee of Creditors (CoC) is a committee consisting of the financial creditors of the corporate debtor. This Committee eventually forms the decision making body of various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the CIRP.

The power to ratify the managerial decisions taken by the RP vests upon the CoC. The CoC approves/ rejects the Resolution Plan, extension of CIRP period, decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP, etc.

The CoC at its first meeting shall appoint a Resolution Professional (RP). In doing so, it may either confirm the appointment of IRP as RP or appoint another RP of its choice. The RP then takes over the management of the corporate debtor from the IRP. The RP shall act under the guidance and superintendence of the CoC. Unless the Code specifies a certain voting percentage for a particular decision of the CoC, all other decisions of the CoC shall be taken by a vote of not less than 51% of voting share of the financial creditors. Each member of the CoC has voting share in proportion to the amount of debt outstanding to the corporate debtor. The RP shall take prior approval of the CoC for matters stipulated in the Code.

RESOLUTION PLAN

The objective behind the CIRP is that the corporate debtor should get a chance to revive itself from insolvency. The corporate debtor is in insolvency due to various reasons including market conditions, business cycles, wrongful acts of the promoters, amongst others. The corporate debtor should get a fresh chance to revive itself and recommence its operations either with the same management or a new management. With this intent in mind, the RP invites proposals from prospective resolution applicants to revive the corporate debtor. These proposals are known as “resolution plans” and they can be submitted by any person who is interested in the revival of the company. These plans include proposals to pay off the existing liabilities of the corporate debtor in part or in full and to restart its operations over a period of time. There are safeguards against a defaulting promoter submitting a resolution plan so that such defaulting promoter is not able to take over a debt free company at lower cost by way of a resolution plan.

The resolution plan is submitted to the RP, who after confirming that the resolution plan meets the conditions laid down under the Code, places all such plans before the CoC. The CoC shall approve the most suitable resolution plan. Such resolution plan approved by the CoC is submitted to NCLT for its approval. In case the Tribunal approves the resolution plan, the corporate debtor is out of CIRP.

LIQUIDATION PROCESS

Liquidation of corporate person is considered to be the last resort in order to recover money. When the resolution plan has failed and no other way could be adopted, then dissolution of company is the only resort. An auction is conducted where the assets of the company is sold to realize money to return it to the lenders.

Sections 33 to 54 of the Insolvency and Bankruptcy Code, 2016 and IBBI (Liquidation Process) Regulations, 2016 lays down the law relating to liquidation process for corporate persons.

Section 33 of the Code lists out the triggers for initiating the liquidation process for corporate persons. Section 33 of the Code reads as follows:

  1. Where the Adjudicating Authority,
    • before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan; or
    • rejects the resolution plan for the non-compliance of the requirements specified therein,
      it shall –
      • pass an order requiring the corporate debtor to be liquidated;
      • issue a public announcement stating that the corporate debtor is in liquidation; and
      • require such order to be sent to the authority with which the corporate debtor is registered.
  2. Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than 66% of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
  3. Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
  4. On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
  5. When a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:
    Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.
  6. The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

Appointment of Liquidator
On the appointment of a liquidator under the Code, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the liquidator.

Liquidation Estate
Section 36 provides for the creation of a liquidation estate comprising the assets of the corporate debtor as set out in section 36(3). Section 36 also lists out the assets which are to be excluded from the liquidation estate. The Central Government has been given the power to notify assets, in consultation with the appropriate financial sector regulators, which will be excluded from the estate in the interest of efficient functioning of the financial markets.

Section 36(1) provides that for the purpose of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

Section 36(2) further provides that the liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

Consolidation, verification and admission/rejection of claims
The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process, pursuant to which, the liquidator shall verify the claims submitted within such time as specified by the Board. The liquidator may require any creditor or the corporate debtor or any other person to produce any other document or evidence which he thinks necessary for the purpose of verifying the whole or any part of the claim. After verification of claims, the liquidator may either admit or reject the claim, in whole or in part. The liquidator shall communicate his decision of admission or rejection of claims to the creditor and corporate debtor within seven days of such admission or rejection of claims.

A creditor may appeal to the Adjudicating Authority against the decision of the liquidator accepting or rejecting the claims within 14 days of the receipt of such decision.

Distribution of assets
The proceeds from the sale of the liquidation assets shall be distributed in the order of priority as laid down in Section 53 of the Code.

Dissolution of corporate debtor
Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor. A copy of the dissolution order passed by the adjudicating authority shall be forwarded to the ROC within 7 days from the date of such order.

VOLUNTARY LIQUIDATION

VOLUNTARY LIQUIDATION
The Insolvency and Bankruptcy Code 2016 not only enables the insolvency proceedings of the insolvents but also contains provisions for solvent entities that have not committed any default and want to surrender their business and refrain from carrying on their business. In order for companies or LLPs to be eligible for voluntary liquidation, the solvent entity must be in a state to pay off its debts.

The provisions relating to voluntarily winding up of Companies have been removed from the Companies Act, 2013 (w.e.f. April 01,2017) and are now governed by Insolvency and Bankruptcy Code.

A corporate person will be eligible to opt for voluntary liquidation under the Code provided it fulfils the two mandatory conditions i.e.

  • either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
  • the company is not being liquidated to defraud any person.

The Code reduces the intervention of the regulatory authorities drastically that fasten up the process. Once the liquidation process is completed, the liquidator has to make an application to the Tribunal for passing the order of dissolution of the company.

Section 59 of the code provides that a Corporate person (includes Company, LLP, etc. in terms of definition under section 3(7) who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of Chapter V, Part II of Code.

The procedure of voluntary liquidation of a corporate person under the Code in brief is given below:
Step I: Submission of declaration(s) verified by an affidavit to ROC and IBBI, stating that the company will be able to pay its dues and is not being liquidated to defraud any person. The declaration shall be accompanied by audited financial statements and record of business operations of the corporate person for the previous 2 years or for the period since its incorporation, whichever is later and a report of the valuation of the assets of the corporate person, if any prepared by a registered valuer;

Step II:   Passing of special resolution for approving the proposal of voluntary liquidation and appointment of liquidator (“Approval”), within 4 (four) weeks of the aforesaid declaration(s). If a corporate person owes debts, approval of creditors representing 2/3rd in value of debt of the company would also be required; Subject to the approval of the creditors, the liquidation proceedings in respect of a corporate person shall be deemed to have commenced from the date of passing of the resolution.

Step III: Public announcement inviting claims of all stakeholders, within 5 (five) days of such approval, in newspaper as well as on website of the corporate person;

Step IV: Intimation to the ROC and the Board about the approval, within 7 (seven) days of such approval;

Step V: Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action etc., and submission of the same by the liquidator to the corporate person within 45 days of such approval;

Step VI: Verification of claims, within 30 (thirty) days form the last date for receipt of claims and preparation of list of stakeholders, within 45 (forty-five) days from the last date for receipt of claims. A creditor may appeal to the Adjudicating Authority against the decision of the liquidator with respect to such claim;

Step VII: Opening of a bank account in the name of the corporate person followed by the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of all moneys due to the corporate person;

Step VIII: Sale of assets, recovery of monies due to corporate person, realization of uncalled capital or unpaid capital contribution;

Step IX: Distribution of the proceeds from realization within 6 (six) months from the receipt of the amount to the Stakeholders. A stakeholder shall forthwith return any monies received by him in distribution, which he was not entitled to at the time of distribution, or subsequently became not entitled to;

Step X: Submission of final report by the liquidator to the corporate person, ROC and the Board and the final report along with application to the National Company Law Tribunal (“NCLT”) for the dissolution;

Step XI: Submission of NCLT order regarding the dissolution, to the concerned ROC within 14 (fourteen) days of the receipt of order.

The liquidator shall preserve a physical or an electronic copy of the reports, registers and books of account for at least 8 years after the dissolution of the corporate person, either with himself or with an information utility.

The liquidator shall endeavour to wind up the affairs of the corporate person within 12 (twelve) months from the voluntary liquidation commencement date;

WATER FALL ARRANGEMENT [Section 53 of the Code]
Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified:

  • Insolvency resolution process and liquidation costs
  • Workmen dues (upto 24 months) and dues to secured creditor who has relinquished security (to rank equally)
  • Wages and unpaid dues to employees (upto 12 months) – other than workmen
  • Financial debts of unsecured creditors
  • Government dues (upto 2 years) and unpaid secured creditors following enforcement of security interest (to rank equally)
  • Any remaining debts and dues
  • Preference shareholders, if any
  • Equity shareholders or partners, as the case may be

The fees payable to the liquidator shall be deducted proportionately from proceeds payable to each class of recipients and proceeds to the relevant recipient shall be distributed after such deduction.

DISSOLUTION OF CORPORATE DEBTOR
Once the assets of the corporate debtor are completely liquidated, the liquidator shall make an application to NCLT for dissolution of the corporate debtor. The Tribunal shall pass necessary order to dissolve the corporate debtor.

Pre Packaged Insolvency Resolution Process

PPIRP is available for resolution of stress of corporate MSMEs. It is available as an alternate option, should the stakeholders like to use it. Under this process, corporate debtor itself makes a base resolution plan and file application to Adjudicating Authority for resolution process. Further, here ownership and management is retained with corporate debtor itself.

Pre-packaged insolvency commencement date means the date of admission of an application for initiating the pre-packaged insolvency resolution process by the Adjudicating Authority under section 54C(4)(a);

Base resolution plan means a resolution plan provided by the corporate debtor under section 54A(4)(c);

Corporate Debtor means company or LLP

Governing Framework
The provisions governing PPIRP are available in:

  • the Insolvency and Bankruptcy Code, 2016
  • the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Rules, 2021; and
  • the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.

Corporate debtors eligible for pre-packaged insolvency resolution process [Section 54A]

  1. Who is eligible to make applicatio
    An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under Micro, Small and Medium Enterprises Development Act, 2006.
  2. Pre-conditions for filing application
    An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor, who commits a default referred to in section 4 [of at least ₹10 lakh], subject to the following conditions, that––
    • it has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of 3 years preceding the initiation date;
    • it is not undergoing a corporate insolvency resolution process;
    • no order requiring it to be liquidated is passed under section 33 (initiation of liquidation);
    • it is eligible to submit a resolution plan under section 29A;
      Section 29A talks about persons not eligible to be resolution applicant like undischarged insolvent, wilful defaulter in accordance with the guidelines of the RBI etc.
    • Proposal and approval of the name of the insolvency professional
      the financial creditors of the corporate debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, have approved such proposal in such form as may be specified.
    • Declaration by directors/partners
      The majority of the directors or partners of the corporate debtor, as the case may be, have made a declaration stating, inter alia, –
      • that the corporate debtor shall file an application for initiating pre-packaged insolvency resolution process within a definite time period not exceeding 90 days;
      • that the pre-packaged insolvency resolution process is not being initiated to defraud any person; and
      • the name of the insolvency professional proposed and approved to be appointed as resolution professional under clause (e);
  • Special Resolution/3/4th Approval for filing of an application
    The members of the corporate debtor have passed a special resolution, or at least 3/4 of the total number of partners, as the case may be, of the corporate debtor have passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process.

    3. Approval from financial creditors for the filing of an application
    The corporate debtor shall obtain an approval from its financial creditors, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, for the filing of an application for initiating pre-packaged insolvency resolution process.
    4. Prior to seeking approval from financial creditors under sub section (3), the corporate debtor shall provide such financial creditors with –
    • the declaration referred to in clause (f) of sub- section (2);
    • the special resolution or resolution referred to in clause (g) of sub-section (2);
    • a base resolution plan which conforms to the requirements referred to in section 54K, and such other conditions as may be specified; and
    • such other information and documents as may be specified.

 

Application to initiate pre-packaged insolvency resolution process [Section 54C]

  1. Where a corporate debtor meets the requirements of section 54A, a corporate applicant thereof may file an application with the Adjudicating Authority for initiating pre-packaged insolvency resolution process.
  2. The application under sub-section (1) shall be filed in such form, containing such particulars, in such manner and accompanied with such fee as may be prescribed.
  3. Documents/information to be provided along with the application
    The corporate applicant shall, along with the application, furnish–
    • the declaration, special resolution or resolution, as the case may be, and the approval of financial creditors for initiating pre-packaged insolvency resolution process in terms of section 54A;
    • the name and written consent of the insolvency professional proposed to be appointed as resolution professional, as approved under section 54A(2), and his report as referred to in section 54B(1)(a);
    • information relating to books of account of the corporate debtor and such other documents relating to such period as may be specified.

4. Time limit to accept/reject the application
The Adjudicating Authority shall, within a period of 14 days of the receipt of the application, by an order,––

    • admit the application, if it is complete; or
    • reject the application, if it is incomplete:
      Provided that the Adjudicating Authority shall, before rejecting an application, give notice to the applicant to rectify the defect in the application within 7 days from the date of receipt of such notice from the Adjudicating Authority..
      5. Commencement of process
      The pre-packaged insolvency resolution process shall commence from the date of admission of the application under clause (a) of sub-section (4).

 

Time-limit for completion of pre-packaged insolvency resolution process [Section 54D]

  1. Total time
    The pre-packaged insolvency resolution process shall be completed within a period of 120 days from the pre-packaged insolvency commencement date.
  2. Time to submit the resolution pla
    The resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority under sub-section (4) or sub-section (12), as the case may be, of section 54K, within a period of 90 days from the pre-packaged insolvency commencement date.
  3. Application for termination where no resolution plan is approved by CoC
    Where no resolution plan is approved by the committee of creditors within 90 days, the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process.

Declaration of moratorium and public announcement during pre-packaged insolvency resolution process [Section 54E]

1.The Adjudicating Authority shall, on the pre-packaged insolvency commencement date, along with the order of admission under section 54C –

  • declare a moratorium for the purposes referred to in section 14, which shall, mutatis mutandis apply, to the proceedings under this Chapter;
  • appoint a resolution professional –

(i)            as named in the application, if no disciplinary proceeding is pending against him; or

(ii)           based on the recommendation made by the Board, if any disciplinary proceeding is pending against the insolvency professional named in the application.

  • cause a public announcement of the initiation of the pre-packaged insolvency resolution process to be made by the resolution professional immediately after his appointment.

2. The order of moratorium shall have effect from the date of such order till the date on which the pre-packaged insolvency resolution process period comes to an end.

List of claims and preliminary information memorandum [Section 54G]
The corporate debtor shall, within 2 days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date, namely:–

  • a list of claims, along with details of the respective creditors, their security interests and guarantees, if any; and
  • a preliminary information memorandum containing information relevant for formulating a resolution plan.

Management of affairs of corporate debtor [Section 54H]
During the pre-packaged insolvency resolution process period,–

  • the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors or the partners, as the case may be, of the corporate debtor, subject to such conditions as may be specified;
  • the Board of Directors or the partners, as the case may be, of the corporate debtor, shall make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern; and
  • the promoters, members, personnel and partners, as the case may be, of the corporate debtor, shall exercise and discharge their contractual or statutory rights and obligations in relation to the corporate debtor, subject to the provisions of this Chapter and such other conditions and restrictions as may be prescribed.

Committee of creditors [Section 54I]

  1. The resolution professional shall, within 7 days of the pre-packaged insolvency commencement date, constitute a committee of creditors, based on the list of claims:
    Provided that the composition of the committee of creditors shall be altered on the basis of the updated list of claim and any such alteration shall not affect the validity of any past decision of the committee of creditors.
  2. The first meeting of the committee of creditors shall be held within 7 days of the constitution of the committee of creditors.
  3. Provisions of section 21 [Committee of Creditors], except sub-section (1) thereof, shall, mutatis mutandis apply, in relation to the committee of creditors under this Chapter.

Vesting management of corporate debtor with resolution professional [Section 54J]

  1. Where the committee of creditors, at any time during the pre-packaged insolvency resolution process period, by a vote of not less than 66% of the voting shares, resolves to vest the management of the corporate debtor with the resolution professional, the resolution professional shall make an application for this purpose to the Adjudicating Authority.
  2. On an application made under sub-section (1), if the Adjudicating Authority is of the opinion that during the pre-packaged insolvency resolution process–
    • the affairs of the corporate debtor have been conducted in a fraudulent manner; or
    • there has been gross mismanagement of the affairs of the corporate debtor,
      it shall pass an order vesting the management of the corporate debtor with the resolution professional.

 

Consideration and approval of resolution plan [Section 54K]

  1. The corporate debtor shall submit the base resolution plan to the resolution professional within 2 days of the pre-packaged insolvency commencement date, and the resolution professional shall present it to the committee of creditors.
  2. The committee of creditors may provide the corporate debtor an opportunity to revise the base resolution plan prior to its approval under sub-section (4) or invitation of prospective resolution applicants under sub-section (5), as the case may be.
  3. The resolution plans and the base resolution plan, submitted under this section shall conform to the requirements referred to in sub-sections (1) and (2) of section 30 [Submission of Resolution Plan].
  4. Approval of Base Resolution Plan
    The committee of creditors may approve the base resolution plan for submission to the Adjudicating Authority if it does not impair any claims owed by the corporate debtor to the operational creditors.
  5. Invitation of alternative resolution plans
    Where –
    a. the committee of creditors does not approve the base resolution plan under sub-section (4); or
    b. the base resolution plan impairs any claims owed by the corporate debtor to the operational creditors,
    the resolution professional shall invite prospective resolution applicants to submit a resolution plan or plans, to compete with the base resolution plan, in such manner as may be specified.
  6. The resolution applicants submitting resolution plans pursuant to invitation under sub-section (5), shall fulfil such criteria as may be laid down by the resolution professional with the approval of the committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified.
  7. The resolution professional shall provide to the resolution applicants, –
    • the basis for evaluation of resolution plans for the purposes of sub-section (9), as approved by the committee of creditors subject to such conditions as may be specified; and
    • the relevant information referred to in section 29, which shall, mutatis mutandis apply, to the proceedings under this Chapter,
      in such manner as may be specified.
  8. The resolution professional shall present to the committee of creditors, for its evaluation, resolution plans which conform to the requirements referred to in sub-section (2) of section 30.
  9. The committee of creditors shall evaluate the resolution plans presented by the resolution professional and select a resolution plan from amongst them.
  10. If selected alternative resolution plan is significantly better than the base resolution plan
    Where, on the basis of such criteria as may be laid down by it, the committee of creditors decides that the resolution plan selected under sub-section (9) is significantly better than the base resolution plan, such resolution plan may be selected for approval under subsection (12)
  11. If selected alternative resolution plan is not significantly better than the base resolution plan
    Where the resolution plan selected under subsection (9) is not considered for approval or does not fulfil the requirements of sub-section (10), it shall compete with the base resolution plan, and one of them shall be selected for approval under subsection (12).
  12. Approval of resolution plan
    The resolution plan selected for approval under sub-section (10) or sub-section (11), as the case may be, may be approved by the committee of creditors for submission to the Adjudicating Authority
    If no resolution plan is approved by CoC
    Provided that where the resolution plan selected for approval under sub-section (11) is not approved by the committee of creditors, the resolution professional shall file an application for termination of the pre-packaged insolvency resolution process in such form and manner as may be specified.
  13. The approval of the resolution plan under subsection (4) or sub-section (12), as the case may be, by the committee of creditors, shall be by a vote of not less than 66% of the voting shares, after considering its feasibility and viability.

The resolution professional shall submit the resolution plan as approved by the committee of creditors under sub-section (4) or sub-section (12), as the case may be, to the Adjudicating Authority.

 

Approval of resolution plan [Section 54L]
If the Adjudicating Authority is satisfied with the resolution plan
If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) or sub-section (12) of section 54K, as the case may be, meets the requirements of section 30(2), it shall, within 30 days of the receipt of such resolution plan, by order approve the resolution plan:

Provided that the Adjudicating Authority shall, before passing an order for approval of a resolution plan under this sub-section, satisfy itself that the resolution plan has provisions for its effective implementation.

If the Adjudicating Authority is not satisfied with the resolution plan
Where the Adjudicating Authority is satisfied that the resolution plan does not conform to the requirements of section 30(2), it may, within 30 days of the receipt of such resolution plan, by an order, reject the resolution plan and pass an order under section 54N.

If Adjudicating Authority has passed order for vesting of management of Corporate Debtor to Resolution Professional and the resolution plan approved by the CoC does not result in the change in the management or control of the corporate debtor, the Adjudicating Authority shall pass an order

  • rejecting such resolution plan;
  • terminating the PPIRP and passing a liquidation order in respect of the corporate debtor; and
  • declaring that the PPIRP costs, if any, shall be included as part of the liquidation costs for the purposes of liquidation of the corporate debtor.

Termination of pre-packaged insolvency resolution process [Section 54N]
The Adjudicating Authority shall, within 30 days of the date of application made by Resolution Professional, by an order, terminate the PPIRP

  • If CoC does not approve any resolution plan in 90 days
  • CoC neither approves selected resolution plan nor base resolution plan,
  • CoC decides to terminate PPIRP by a vote of 66% of the voting shares

If AA has passed an order for vesting of management in RP and PPIRP is required to be terminated in above circumstances, then AA shall pass an order of liquidation of corporate debtor.

Initiation of corporate insolvency resolution process [Section 54N]
The CoC may resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, by a vote of 66% of the voting shares. The CoC can pass such resolution at any time after the PPICD but before the approving the resolution plan.

The Adjudicating Authority shall, within 30 days of the date of such intimation, pass an order to

  • terminate the PPIRP and initiate corporate insolvency resolution process.
  • appoint the resolution professional as the interim resolution professional.

The order so passed by the AA shall be deemed to be an order of admission of an application under section 7 and shall have the same effect and CIRP shall commence from the date of such order.

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
(Effective Date: 9th April, 2021)

  •  Meeting of the unrelated financial creditors: 5 day’s notice shall be given to unrelated financial creditor for meeting which may be called at shorter notice if agreed by them.
  • Proposal of name of IRP: The financial creditors who are not related parties of the corporate debtor and have not less than 10% of the value of the total financial debt of such creditors may propose names of insolvency professionals.
  • Meeting of Operational Creditors: Where the corporate debtor has no financial debt or where all financial creditors are related parties, the applicant shall convene a meeting of operational creditors, who are not related parties of the corporate debtor.
  • Public announcement: The resolution professional shall make a public announcement within 2 days of the commencement of the process.
  • Meetings of the Committee of Creditors: A resolution professional may convene, when considers necessary and shall convene a meeting, if a request to that effect is made by members of the committee representing 33% of voting share. Notice period shall be at least 3 days. A meeting of the committee shall quorate if members of the committee representing at least 33% of the voting share are present either in person or by video conferencing or other audio and visual means.
  • Appointment of registered valuers: The resolution professional shall within 3 days of his appointment, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor.
  • Information memorandum: The resolution professional shall finalise the information memorandum and submit to members of the committee within 14 days of the pre-packaged insolvency commencement after receiving an undertaking of confidentiality from a member of the committee.
  • Invitation for resolution plans: The resolution professional shall publish brief particulars of the invitation for resolution plans not later than 21 days from the pre-packaged insolvency commencement date.
  • Evaluation of resolution plans: The resolution plans received, which comply with the requirements of the Code and these Regulations, shall be evaluated on the basis for evaluation. The resolution plan which gets the highest score shall be selected for competition with the base resolution plan.
  • Approval of resolution plan:
    • The resolution plan selected shall be considered by the committee for approval, if it is significantly better than the base resolution plan (BRP).
    • Where no resolution plan is received, which complies with the requirements of the Code and these Regulations, the base resolution plan may be considered by the committee for approval.
    • If resolution plan is selected but it is not significantly better than BRP, then the resolution professional shall disclose the scores of the resolution plan selected and the base resolution plan to submitters of these resolution plans and invite them to improve their resolution plans by competing with each other.
    • Improvement at each time shall be at least by tick size.
    • This process shall be completed within a time-window of 48 hours.
    • The resolution plan having higher score on completion of process of improvement shall be considered by the committee for approval.
  • Application to Adjudicating Authority:
    • Where a resolution plan is approved by the committee, the resolution professional shall submit an application, along with a compliance certificate to the Adjudicating Authority for approval.
    • The resolution professional shall forthwith send a copy of the order of the Adjudicating Authority approving or rejecting a resolution plan to the participants and the resolution applicant.
    • Where no resolution plan is approved by the committee or where the committee has approved the termination of process, the resolution professional shall file an application to the Adjudicating Authority for termination of process.

Flow Chart of PPIRP

Fast Track Corporate Insolvency Resolution Process

The Central Government notified that w.e.f. 14th June,2017, an application for fast track corporate insolvency resolution process may be made in respect of the following corporate debtors, namely :-

  • a small company as defined under clause (85) of section 2 of Companies Act; or
  • a Startup (other than the partnership firm); or
  • an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding rupees one crore.

Time period for completion of fast track corporate insolvency resolution process:

  • The fast track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date.
  • An application shall be filed by resolution professional to Adjudicating Authority for extending the time period beyond 90 days if authorised by way of a resolution passed at a meeting of the committee of creditors and supported by a vote of 75% of the voting share.
  • The Adjudicating Authority may, by order, extend the duration of such process beyond the said period 90 days by such further period, as it thinks fit, but not exceeding 45 days.
  • Any extension of the fast track corporate insolvency resolution process under this section shall not be granted more than once.

Manner of initiating fast track corporate insolvency resolution process:
An application for fast track corporate insolvency resolution process may be filed by a creditor or corporate debtor as the case may be, alongwith:-

  • the proof of the existence of default as evidenced by records available with an information utility or such other means as may be specified by the Board; and
  • such other information as may be specified by the Board to establish that the corporate debtor is eligible for fast track corporate insolvency resolution process.

The process for conducting a corporate insolvency resolution process under Chapter II and the provisions relating to offences and penalties under Chapter VII shall apply to this Chapter as the context may require.

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (FAST TRACK INSOLVENCY RESOLUTION PROCESS FOR CORPORATE PERSONS) REGULATIONS, 2017

Applicability of the Regulations:
These Regulations shall apply to the fast track process under Chapter IV of Part II of the Code.

Public announcement:
An insolvency professional shall make a public announcement within 3 days of his appointment as an interim resolution professional. Public announcement shall provide the last date for submission of proofs of claim, which shall be 10 days from the date of appointment of the interim resolution professional.

Verification of claims: The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the fast track commencement date, within 7 days from the last date of the receipt of the claims.

Committee with only operational creditors: Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee formed shall consist of

  •  18 largest operational creditors by value
  • one representative elected by all workmen and
  • one representative elected by all employees.

Filings by the interim resolution professional: The interim resolution professional shall file a report certifying the constitution of the committee to the Adjudicating Authority on or before the expiry of 21 days from the date of his appointment. The interim resolution professional shall convene the first meeting of the committee within 7 days of filing the report(s) under this Regulation.

Meetings of the committee: A resolution professional may convene a meeting of the committee as and when he considers necessary, and shall convene a meeting if a request to that effect is made by members of the committee representing 33% of the voting rights.

Appointment of registered valuer: The resolution professional shall within 7 days of his appointment, appoint one registered valuer to determine the fair value and the liquidation value of the corporate debtor.

Sale of assets outside the ordinary course of business: With the approval of CoC, the resolution professional may sell unencumbered asset(s) of the corporate debtor, other than in the ordinary course of business, if he is of the opinion that such a sale is necessary for a better realisation of value under the facts and circumstances of the case. Provided that the book value of all assets sold during fast track process period in aggregate under this sub-regulation shall not exceed 10% of the total claims admitted by the interim resolution professional.

Information memorandum: The resolution professional shall submit the information memorandum in electronic form to:-

  • each member of the committee within 2 weeks of his appointment as resolution professional
  • each prospective resolution applicant latest by the date of invitation of resolution plan

Invitation of Resolution Plans: The resolution professional shall issue an invitation, including evaluation matrix, to the prospective resolution applicants, to submit resolution plans at least 15 days before the last date of submission of resolution plans.

Resolution plan: A resolution plan shall provide for the measures, as may be necessary for insolvency resolution of the corporate debtor for maximization of value of its assets.

Approval of resolution plan: The resolution professional shall submit the resolution plan approved by the committee to the Adjudicating Authority, at least 15 days before the expiry of the maximum period permitted under section 56 for the completion of the fast track corporate insolvency resolution process, with the certification that-

  •  the contents of the resolution plan meet all the requirements of the Code and the Regulations; and
  • the resolution plan has been approved by the committee.

The resolution professional shall forthwith send a copy of the order of the Adjudicating Authority approving or rejecting a resolution plan to the participants and the resolution applicant.

Extension of the fast track process period: The committee is of the opinion that the fast track process cannot be completed within the stipulated 90 days, it may instruct the resolution professional to make an application to the Adjudicating Authority under section 56 to extend the fast track process period. The resolution professional shall, on receiving an instruction from the committee under this Regulation, make an application to the Adjudicating Authority for such extension.

WINDING UP OF COMPANIES

According to Halsbury’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about & in the course of which its assets are collected and realised; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.”

According to Section 2(94A), “Winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.

Thus Winding up is a legal process.

In India, Chapter XX of Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016 deals with the Winding Up of the Companies.

Difference between ‘Winding Up’ and ‘Dissolution’

  1. Winding up is the first stage of ending the legal existence of the entity. In this stage, the assets of the entity are realized, its liabilities paid off and surplus, if any, is distributed amongst the contributories.
    Whereas dissolution is the final stage after completion of winding up process and by act of law, the legal existence of the entity comes to an end.
  2. The winding up process is handled by a liquidator / insolvency professional. The dissolution can happen only by way of an order passed by the adjudicating authority.
  3.  Creditors can prove their claims during winding up but not on dissolution since the entity no longer exists on dissolution.
  4. Winding up need not result in dissolution in all cases. A company which is in winding up can be taken over / amalgamated by any other entity / company which will result in the company coming out of winding up process and being handed over to the shareholders. This is not possible in case of dissolution.

Winding Up by the Tribunal

Grounds on which a Company may be wound up by the Tribunal [Section 271]
A company may, on a petition under section 272, be wound up by the Tribunal,—

  1. if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
  2. if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
  3. if on an application made by the Registrar or any other person authorised by the Central Government, the Tribunal is of the opinion that
    • the affairs of the company have been conducted in a fraudulent manner or
    • the company was formed for fraudulent and unlawful purpose or
    • the persons concerned in the formation or management of its affairs have been guilty of fraud or misconduct in connection therewith
      and that it is proper that the company be wound up;
  4. if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding 5 consecutive financial years; or
  5. if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Petition for Winding Up [Section 272]
Who may apply for Winding Up
Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by—

  • the company;
  • any contributory or contributories;
  • all or any of the persons specified in clauses (a) and (b);
  • the Registrar;
  • any person authorised by the Central Government in that behalf; or
  • in a case falling under clause (b) of section 271, by the Central Government or a State Government.

Note:

  • Any petition filed by the company shall be accompanied by a statement of affairs.
  • A petition can be filed by the Registrar only with previous sanction of the Central Government which shall be accorded only after giving to the company a reasonable opportunity of being heard.
  • Any petition filed under this section, apart from that filed by the Registrar himself, shall be served on the Registrar and the Registrar shall submit his views to the Tribunal within 60 days of receipt of such petition.

On a petition filed under section 272, the Tribunal may pass any of the following orders within 90 days of presentation of the petition:

  • Dismiss it, with or without costs;
  • Make any interim order as it thinks fit;
  • Appoint a provisional liquidator of the company till the making of a winding up order;
  • Make an order for the winding up of the company with or without costs; or
  • Any other order as it thinks fit.

The Tribunal shall give an opportunity of being heard to the company before appointment of a Provisional Liquidator.

Within three weeks from the date of passing of winding up order, the Company Liquidator shall make an application to the Tribunal for constitution of a winding up committee to assist and monitor the progress of liquidation proceedings by the Company Liquidator and such winding up committee shall comprise of the following persons, namely:—

  • Official Liquidator attached to the Tribunal;
  • nominee of secured creditors; and
  • a professional nominated by the Tribunal.

The Company Liquidator shall be the convener of the meetings of the winding up committee.

The liquidator is required to submit to the Tribunal, a report containing the following particulars, within 60 days from the order of winding up or appointment of liquidator:

  • the nature and details of the assets of the company including their location and value, stating separately the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held by the company
  • valuation Report of the assets obtained from registered valuers
  • amount of capital issued, subscribed and paid-up;
  • the existing and contingent liabilities of the company including names, addresses and occupations of its creditors, stating separately the amount of secured and unsecured debts, and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given;
  • the debts due to the company and the names, addresses and occupations of the persons from whom they are due and the amount likely to be realised on account thereof;
  • guarantees, if any, extended by the company;
  • list of contributories and dues, if any, payable by them and details of any unpaid call;
  • details of trademarks and intellectual properties, if any, owned by the company;
  • details of subsisting contracts, joint ventures and collaborations, if any;
  • details of holding and subsidiary companies, if any;
  • details of legal cases filed by or against the company; and
  • any other information which the Tribunal may direct or the Company Liquidator may consider necessary to include.

The Company Liquidator shall include in his report the manner in which the company was promoted or formed and whether in his opinion any fraud has been committed by any person in its promotion or formation or by any officer of the company in relation to the company since the formation thereof and any other matters which, in his opinion, it is desirable to bring to the notice of the Tribunal.

He shall also make a report on the viability of the business of the company or the steps which, in his opinion, are necessary for maximising the value of the assets of the company. The Company Liquidator shall make periodical reports to the Tribunal and in any case make a report at the end of each quarter with respect to the progress of the winding up of the company in such form and manner as may be prescribed. He may make any further reports as he thinks fit.

When the affairs of a company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of such company. The final report so approved by the winding up committee shall be submitted by the Company Liquidator before the Tribunal for passing of a dissolution order in respect of the company.

The Tribunal shall on an application filed by the Company Liquidator or when the Tribunal is of the opinion that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly. A copy of the order shall be forwarded by the Company Liquidator to the Registrar, within 30 days from the date thereof, who shall record the dissolution of the company in the Register of Companies.

Companies (Winding Up) Rules, 2020

With a view to systemize the procedure of winding up of a Company under the Act, the Ministry of Corporate Affairs (‘MCA’) vide notification dated 24th January 2020, had notified the Companies (Winding Up) Rules, 2020 (‘The Rules’).

Important highlights:
It allows the following companies to wind up their business by making an application to Central Government without approaching NCLT:

Companies accepting deposit and having total outstanding depositsUpto INR 25 Lacs
Companies having total outstanding loan including secured loanUpto INR 50 Lacs
Companies having total turnoverUpto INR 50 Crores
Companies with Paid up capitalUpto INR 1 Crore
  • These rules allows companies having book value of assets upto Rs. 1 crore can approach Central Government for liquidation
  • The provisions of the rules relating to filing and audit of the Company Liquidator’s accounts and its procedure as well as disposing of assets shall be applicable to above class of companies with the Central Government instead of NCLT.
  • It lays down the process for meeting of creditors and contributories of the Company, and specifies the scenarios in which creditors can and cannot vote
  • It makes it necessary for all the money lying in the bank account of Company Liquidator, which is not immediately required for the purposes of winding up, to be invested in government securities or in interest bearing deposits in any scheduled bank
  • Its lay down the procedure for maintenance of registers and books of accounts by the Company Liquidator
  • It also outlines the procedure for creditors to prove their debts and claims against the company and if the proof of such debt gets rejected by the Company Liquidator, there is also a provision and process for creditor to make an appeal to Tribunal

Thus, the winding up rules has reduced the burden of winding up on NCLT by shifting the power to Central Government in specified cases, which will help in shortening the winding up timelines drastically.

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