The Insolvency Resolution Process: Do’s and Don’ts

Introduction

Insolvency can be defined as the state of not being able to pay back the money owned either by an individual or the company. The insolvency of a corporate person caters to the insolvency of corporate bodies, for instance, a limited company or a private company. There are two forms of insolvency: balance sheet and cash flow insolvency.

Cash flow insolvency occurs when the individual or company has plentiful assets to repay what is owed by them but they lack the appropriate form of payment. For instance, a person may have a luxurious bungalow along with other valuable assets but doesn’t have enough liquid assets to repay the debt as and when it falls due. Such kind of insolvency is usually concluded through negotiation between both the parties.

Balance sheet insolvency is a situation where the individual or the company doesn’t have adequate assets to repay all the debts. There are instances where companies enter bankruptcy but this is not the only solution. Once all the parties accept the loss, the easier way to resolve the problem is through negotiation and not bankruptcy. MUDS: one of the leading insolvency law firms in India provides best in class services for all your queries.

Initiation of the Resolution Process

Any failure of payment to the creditor, investor or lender for a very long time by any business entity makes a company insolvent and this particular state is known as the state of insolvency which is submitted to the NCLT (National Company Law Tribunal) either by the financial/operational creditor or by the corporate debtor. When the corporate debtor himself does the needful, the operational creditor has to send across the demand for 10 days to the corporate debtor before the initiation of the entire insolvency resolution process. All financial institutions, banks, lenders, etc. fall under the category of Financial creditors. On the other hand, anyone who has been extended payment of credit during the entire course of business along with suppliers and service providers is also operational creditors. An expert advice is thus needed at every stage of this process. MUDS, a leading insolvency law firm in India provides the best guidance.

Insolvency Resolution Process by an Operational Creditor

10 days of prior notice has to be served to the corporate debtor by the operational creditor asking him to pay back the dues before the insolvency resolution process initiates.

The operational creditor can file an application for insolvency resolution if in case, the corporate debtor doesn’t pay back the amount in that time period or any dispute or any arbitration proceeding pending against it isn’t brought to the notice of operational creditor.

Insolvency Resolution by the Corporate Debtor

According to the provisions contained in Chapter- II of the Code, the corporate debtor or any applicant (i.e. the financial or operational creditor) can file an application for the initiation of insolvency resolution process along with the books of accounts and other financial documents of the business if in case, a corporate debtor has defaulted on the payment of dues to a financial or operational creditor. Also, according to Section 10 (3), (b) the corporate debtor shall also file the name of the proposed resolution professional along with the application.

Public Announcement of Moratorium

On the presentation of the insolvency resolution application, NCLT ought to make a public announcement and appoint the interim resolution professional. This announcement would be for the submission of claims by the creditors.

Moratorium

The moratorium shall be announced by the NCLT for constraining the following:

  • Institution of any suit or a suit that is pending inclusive of execution of any judgement or decree against the corporate debtor.
  • Encumbering, disposing of, alienating or transferring of any property or right or beneficial interest.
  • Any security interest created by the corporate debtor in respect to his property.
  • Recovery of any property that is under the possession of the corporate debtor by the owner or lessor.
  • Terminate the supplies (goods and services) to the corporate debtor.

Role of Insolvency Professional

An IRP (Interim resolution professional) is appointed by NCLT in a period of 14 days from the date of insolvency commencement and it is important to note that the term of his appointment shall not surpass 30 days from the date of appointment.

Administers the operation of the corporate debtor as a going concern while protecting and preserving the value of the property. It is also important to take control and custody of assets which the Corporate Debtor has ownership of.
Receiving and collating the claims from creditors. Both the officers as well as managers of the Corporate Debtor shall report to the IRP for providing access to all the documents and records relevant to the Corporate Debtor.

Formation of Creditors Committee

Insolvency professional shall form a creditor’s committee after the submission of claims by all the creditors wherein all the creditors who have presented their claims shall be a part of. The creditors’ committee shall consist of only financial creditors as per Section 21 (2) of the Code. A resolution plan can be carried out only if it has the approval of 75% of the creditors with voting rights as per the voting share assigned.

The notice for the meeting is only given to operational creditors having aggregate dues of at least 10% of the total debt as per Section 24 (3) (c) of the Code. Irrespective of the size of their claims, operational creditors cannot be the members of the committee.

The opinion of the Creditors’ Committee in regard with the reason of the inability of the corporate debtor to pay back the debts, business or financial crisis, shall pave the way to the committee to go opting for a restructuring plan to the creditors or for the liquidation process.

  • The first meeting of creditor’s committee shall be held within seven days of appointment and can either assign a final insolvency resolution professional or can provide affirmation to the interim insolvency professional to be appointed as insolvency professional only with the approval of 75% votes of the creditors of the creditors’ committee.
  • The directors, partners won’t have voting rights but they shall be present in the meeting.
  • One representative on behalf of the operational creditors shall be joining the meeting on behalf of them but the representative shall not have voting rights on their behalf.

The resolution professional shall prepare an information memorandum for enabling the resolution applicant to form a resolution plan. If in case, the resolution professional is satisfied by the restructuring of the repayment plan submitted by the resolution applicant, he shall further present the plan to the Creditors’ committee seeking their approval. The plan will be confirmed based on 75% of the votes of the creditors with the Creditors’ committee in favour.

NCLT will order the execution of the restructuring plan in a prescribed manner only once the approval is obtained.

The moratorium shall cease to have effect thereon (i.e. after the approval by NCLT). Also, the resolution professional will forward all the records and documents to the board of directors in order to effectively conduct the insolvency resolution process.

Case Study (Essar Steel)

The Supreme Court recently forbade litigations from any stakeholder over a resolution plan before approval by the CoC and NCLT (i.e. the Committee of Creditors and National Company Law Tribunal) in the course of its order on Essar Steel, which is undergoing the insolvency proceedings.

The resolution plan is to be submitted to the Adjudicating Authority under Section 31 of the Code once it is approved by the Committee of Creditors. It is at this stage that the Adjudicating Authority exercises its judicial mind to the resolution plan finally submitted, and then, only after being content with the plan meets at times, might not meet as well the requirements mentioned in Section 30. It may either approve or reject such a plan.

If a resolution plan has passed muster before the Adjudicating Authority and has been approved by the Committee of Creditors, then in that case, this determination can be challenged before the Appellate Authority under Section 61, and may further be challenged before the Supreme Court under Section 62, if there is a question of law arising out of such order, within the time specified in Section 62.

Section 61 of the IBC provides the stakeholders with rights to appeal to NCLAT if the person feels aggrieved by the decision of the NCLT. On the other hand, Section 62 empowers a stakeholder to file a petition in the Supreme Court in case, the person isn’t content with the outcome in the Appellate Tribunal.

However, on grounds of violating any legal provision or eligibility under Section 29(A) of the IBC if a resolution plan is disapproved by the CoC, the NCLT has powers to complete the claims and conclude upon the same after hearing from the applicant and the CoC.

The country’s apex court further stated that Section 60(5) of the IBC, that authorizes the NCLT’s jurisdiction to either contemplate or dispose of any application or proceeding by or against either the corporate person or corporate debtor, “doesn’t authorize NCLT with the jurisdiction to interfere at an applicant’s behest at a stage before the quasi-judicial determination made by the Adjudicating Authority”.

While observing to the timelines as designated in IBC are venerated and must be adhered to in the resolution process, Nariman, in this particular order, noted that the litigation period involved in a case ought to be ruled out from the 270-day time period under IBC but both NCLT and NCLAT cannot inordinately delay any particular case.

This isn’t to state that the NCLT, as well as NCLAT, will be delayed in decision making. This is only to say that in the event of the NCLT, or the NCLAT, or this Court taking time to take the final decision on an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be eliminated, as otherwise a good resolution plan may have to be postponed, leading to corporate death, and the subsequent displacement of employees and workers.

Almost all major insolvency resolution cases, including that of Essar Steel, Bhushan Power & Steel, Binani Cement, Assam Company and several others have been hurt or damaged by prolonged litigations and counter-litigations even before the CoC had narrowed down on a successful bid and presented the same to NCLT.

Quick Takeaways

Provided the fact that both the NCLT as well as NCLAT are to decide on matters emerging under the Code as soon as possible, a blind eye cannot be turned to the fact that a large volume of litigation has now to be handled by both of these Tribunals.

What ought to happen in a case where both the NCLT and the NCLAT decide a matter arising out of Section 31 of the Code beyond the time limit of 180 days or the continued time limit of 270 days? It is stated that the act of the Court shall harm no man.

The only moderate construction of the Code is striking the balance between timely completion of the corporate insolvency resolution process, and the corporate debtor alternatively being put into liquidation.

It must not be forgotten that the corporate debtor consists of several employees and workmen whose daily bread is determined by the outcome of the corporate insolvency resolution process. In addition to it, if there is a resolution applicant who can continue to run the corporate debtor as a going concern, it must be tried and seen that this is made possible.

By | 2019-07-19T17:04:10+00:00 July 19th, 2019|Insolvency Education Series|0 Comments

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