Bankruptcy & Insolvency

As per the provisions of Section 3(11) of the Code, the term “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Further, the term ‘financial debt’ has been defined under section 5(8) of the Code as debt along with 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 dematerialised 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;
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;
1. the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause.

Whereas, as per section 5(21) of the Code, “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

The definition of “debt” under the Code is an inclusive definition and therefore, will also include other liability or obligation in respect of a claim.

In the event any corporate debtor commits a default in payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid then an application for commencement of corporate insolvency resolution process of the corporate debtor can be initiated by any of the following persons:

• Financial creditors;
• Operational creditors;
• Corporate debtor.

Provided that the amount of default is not less than Rupees One Crore (INR 10 Million). The said threshold for filing the application was increased from Rupees One Lac to Rupees One Crore vide notification dated March 24, 2020.

The share of the voting rights of a financial creditor in the committee of creditors is based on the proportion of the financial debt owed to such financial creditor in relation to the total financial debt owed by the corporate debtor.

A financial creditor will be a part of the committee of creditors and have a right to attend and cast vote on the matters laid down before the meeting of said committee. Whereas on the other hand, an operations creditor does not have any right to participate in and vote at the meeting of committee of creditors.

According to section 12 of the Code, the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days (180 days) from the date of admission of the application to initiate such process. An extension may be granted by the Adjudicating Authority only once on an application filed by the resolution professional in this regard which shall not be more than 90 days. However, the aforesaid application for extension can be filed only when a resolution to this effect has been passed at a meeting of the committee of creditors by a vote of 66 percent of the voting shares.

Provided further that the corporate insolvency resolution process shall mandatorily be completed, within 330 days from the insolvency commencement date, including an extension of the period of corporate insolvency resolution process and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

The applicant initiating the corporate insolvency resolution process against the corporate debtor shall fix the expenses to be incurred on or by the interim resolution professional as per regulation 33 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. In the event that the applicant has not fixed the expenses then the Adjudicating Authority shall fix the expenses. Further, the applicant shall bear the expenses which shall be reimbursed by the committee of creditors to the extent it ratifies which shall be treated as insolvency resolution process costs.

The expenses to be incurred on or by the resolution professional shall be fixed by the committee of creditors and the same shall constitute insolvency resolution process costs as per regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The term of the interim insolvency resolution professional continues till the date of appointment of the resolution professional under section 22 of the Code.

Yes, as per the explanation II of Section 11 of the Code, a corporate debtor is entitled to file an application for initiation of corporate insolvency resolution process against another corporate debtor.

Yes. The Adjudicating Authority may allow an applicant to withdraw the application for CIRP after its admission provided such withdrawal has been approved by 90% voting share of the committee of creditors.

As per section 11 of the Code, the following person are not entitled to make an application to initiate corporate insolvency resolution process:

1. a corporate debtor undergoing a corporate insolvency resolution process; or
2. a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or

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

The primary duty of the resolution professional is to preserve and protects the assets of the corporate debtor, including the continued business operations of the corporate debtor. However, the resolution professional shall have other duties as specified under section 25(2) of the Code which includes but not limited to taking immediate custody and control of all the assets of the corporate debtor, represent on behalf of the corporate debtor before any third parties, maintain an updated list of claims and present all resolution plans at the meetings of the committee of creditors etc.

Upon commencement of insolvency proceeding of the corporate debtor, the Adjudicating Authority shall order to declare moratorium on the corporate debtor prohibiting certain proceeding on the corporate debtor as prescribed under section 14 of the Code which includes the following:

1. the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
2. transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;
3. any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest 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.

If a person qualifies to be a financial creditor as well as an operational creditor then as per the provisions of section 21 (4) of the Code, such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor, and shall be included in the committee of creditors, with voting share proportionate to the extent of financial debts owed to such creditor; and shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.

Please note that in terms of the provisions of section 33(1) of Insolvency and Bankruptcy Code, 2016 where Adjudicating Authority does not receive a resolution plan under section 30(6) of the Code 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 of the Code, it shall pass an order requiring the corporate debtor to be liquidated in the manner provided under the Code. Further, the liquidation order shall also be passed in the event that Adjudicating Authority rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein.

Where the corporate debtor has no financial debt or where all the financial creditors are related parties to the corporate debtor then the committee of creditors shall consist of members as following:

1. 18 largest operational creditors by value. It is pertinent to note that in case the number of operational creditors is less than 18, the committee shall include all such operational creditors.
2. One representative elected by all workmen.
3. One representative elected by all employees.

The first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors.

The powers of the board of directors of the corporate debtor shall stand suspended and the same stand vested with the interim resolution professional or resolution professional, as the case may be upon appointment.

A meeting of the committee of creditors shall be called by giving not less than 5 days’ notice in writing to all the following persons:

1. All the members of the committee of creditors, including their authorised representative.
2. All the members of suspended Board of Directors or the partners of the corporate persons, as the case may be.
3. Operational creditors or their representatives if the amount of their aggregate dues is not less than 10% of the debt. However, the operational creditors shall not have any voting rights.

A resolution applicant may submit a resolution plan along with the relevant affidavit to the resolution professional of the corporate debtor. Upon receipt of the resolution plan, a resolution professional shall examine all the plans received by him as per section 30(2) of the Code and present the plan before the committee of creditors for its approval. The resolution plan has to be approved by atleast 66% of voting share of the financial creditors upon complying with other requirements prescribed in this regard. Thereafter, the resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority for its final approval or rejection, as the case be.

A person aggrieved by the order of Adjudicating Authority may file an appeal against its order for approving the resolution plan on the following grounds:

1. the approved resolution plan is in contravention of the provisions of any law for the time being in force;
2. there has been material irregularity in exercise of the powers by the  resolution professional during the corporate insolvency resolution period;
3. the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Insolvency and Bankruptcy Board of India;
4. the insolvency resolution process costs have not been provided for repayment in priority to all other debts; and

the resolution plan does not comply with any other criteria specified by the Insolvency and Bankruptcy Board of India.

The following are the situations where the Adjudicating Authority shall pass an order to liquidate the corporate debtor in the manner as prescribed under section 33 of the Code:

1. If the Adjudicating Authority does not receive the resolution plan from the resolution professional as approved by the committee of creditors before the expiry of the maximum period with or without any extension permitted under the Code.

If the Adjudicating Authority rejects the resolution plan for the non-compliance of the requirements specified under the Code.

An individual acting as resolution professional shall act as the liquidator for the purposes of liquidation subject to submission of a written consent by him in this regard. The Adjudicating Authority may replace the resolution professional and appoint some other resolution professional subject to the conditions as specified under section 34 of the Code.

As per the provision of section 40 of the Code, the liquidator shall verify the claims and upon verification can either admit or reject the claim, in whole or in part. However, in the event that the liquidator rejects the claim the he shall record the reason of such rejection in writing. He shall also inform the creditor and corporate debtor about such admission or rejection within 7 days of such admission or rejection.

A company may liquidate itself voluntarily provided it does not have any debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation. The majority of the directors of the company are required to give a declaration with regard to aforesaid and also confirming that the company is not being liquidated to defraud any person.  

The above declaration shall be accompanied with audited financial statement of the company for the previous two years and a report of the valuation of the assets of the company, if any prepared by a registered valuer.

Once voluntary liquidation of a company has been approved by way of a special resolution of the members of the company the following reporting requirements shall be applicable:

1. The company is required to notify the concerned ROC about the resolution passed to liquidate the company within 7 days of such resolution.
2. The company is required to notify the Insolvency and Bankruptcy Board of India about the resolution passed to liquidate the company within 7 days of such resolution.
3. The insolvency professional acting as the liquidator of the company shall make a public announcement for inviting claims in Form A within 5 days from his appointment.

It is important to note that the requirements as mentioned above are only pursuant to provisions of the IBC. In addition, there will be other reporting requirements under other legislations such as the Income Act, 1961, the Central Goods and Services Tax Act, 2017 etc.

The company under liquidation shall cease to carry on its business except as far as required for the beneficial winding up of its business. However, the company shall continue to exist until a dissolution order has been passed by the concerned NCLT in this regard.

As per the regulation 37 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“Regulation”), the liquidator shall make all possible efforts to complete the liquidation process of the corporate person within 12 months from the liquidation commencement date. In case the liquidation process is not completed within 12 months then the liquidator shall hold a meeting of the contributories within 15 days from the end of the aforesaid period of 12 months. The liquidator shall hold the meeting of the contributories and present annual status report and other documents as per the Regulation.

The term ‘contributory’ in relation to a company means a member of the company and any other person liable to contribute towards the assets of the company in the event of its liquidation.

The concept of ‘pre-packaged insolvency resolution process’ for micro, small or medium enterprise (“MSME”) was introduced by way of The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 notified on 4^th April 2021. Now a Bill in this regard has been proposed by the Government which was recently passed in Lok Sabha. As per the Bill, pre-packaged insolvency resolution process is an alternative insolvency resolution process for MSME in which an application for initiating Pre-packaged insolvency resolution process may be made in respect of a corporate debtor if the corporate debtor has committed any default as mentioned under section 54A of the Code and the base resolution plan shall be submitted by the corporate debtor to the Adjudicating Authority. The pre-packaged insolvency resolution process shall be completed within a period of 120 days from the date of commencement of pre-packaged insolvency resolution process.