Corporate insolvency resolution process under IBC 2016

Insolvency and Bankruptcy Code 2016 was enacted with an aim to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

Corporate Insolvency Resolution Process (CIRP) refers to insolvency proceedings of corporates whereby any corporate debtor who commits a default would thereby allow a financial creditor, an operational creditor, or the corporate debtor itself to initiate corporate insolvency resolution process in respect of such corporate debtor. In this article, we will explain who is eligible to initiate the Insolvency Proceedings against the corporate Debtor.

WHO CAN INITIATE CIRP

• Section 7: Initiation of corporate insolvency resolution process by financial creditor
• Section 8 and 9: Initiation of corporate insolvency resolution process by operational creditor.
• Section 10: Initiation of corporate insolvency resolution process by corporate applicant.

INITIATION BY FINANCIAL CREDITORS

As per Section 5(7) of the Code "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. In simpler terms, Financial Creditors refer to those persons from whom money was borrowed by the corporate debtor as a loan or against interest under any credit facilities. E.g. Banks, Financial Institutions, NBFCs, etc.

Process

1. A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority (i.e., NCLT) when a default has occurred.

2. Application for initiating CIRP shall include:-

• Record of the default recorded with the information utility or such other record or evidence of default.
• Name of the resolution professional proposed to act as an interim resolution professional.
• Any other information as may be specified by the Board.

3. The Adjudicating Authority (i.e., NCLT) shall within 14 days either accept or reject the application filed by the Financial creditors.

4. On Acceptance of Application, the insolvency proceeding will commence from the date of such acceptance and the order shall be sent within 7 days to both Financial creditors and corporate debtors along with the appointment of a proposed resolution professional.

5. On Rejection of Application, a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice shall be provided.

INITIATION BY OPERATIONAL CREDITORS

AS per Section 5(20) of the code "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. These creditors are those who are in employment with the company or are owed some debt in respect of the goods and services provided by them to the Corporate debtor. E.g.- Employees, Suppliers, etc.

Process

1. On default being occurred, the operational creditors shall send a demand notice to the corporate debtors for repayment of the money owed.

2. The Corporate debtor shall within 10 days of demand notice, either gives proof of payment made by it to the creditor or give the existence of dispute against such sum owed in respect of financial creditors.

3. In case the Operational creditor after 10 days of demand notice does not receive any payment or notice of dispute from the Corporate debtor shall file an application with Adjudicating Authority (i.e., NCLT) for initiating a corporate insolvency resolution process.

4. Application for initiating CIRP shall include:

1. a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor.
2. an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt.
3. 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.
4. 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.
5. any other proof as may be prescribed.

5. The Adjudicating Authority (i.e., NCLT) shall within 14 days either accept or reject the application filed by the operational creditors.

6. On Rejection of Application, a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice shall be provided.

INITIATION BY CORPORATE APPLICANT

As per Section 5(5) of the code, the following persons can be "corporate applicant" i.e,

• Corporate debtor or
• A member or partner of the corporate debtor who is authorized to make an application.
• An individual who is in charge of managing the operations and resources of the corporate debtor.
• A person who has control and supervision over the financial affairs of the corporate debtor.

Process

1. On the occurrence of default a corporate applicant may file an application for initiating the corporate insolvency resolution process with the Adjudicating Authority.

2. Application for initiating CIRP shall include:

• 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 professional proposed to be appointed as an interim resolution professional.
• the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving the filing of the application.

3. The Adjudicating Authority (i.e., NCLT) shall within 14 days either accept or reject the application filed by the corporate applicant.

4. On Rejection of Application, a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice shall be provided.

Note: The corporate insolvency resolution process shall commence from the date of admission of the application by the Adjudicating Authority (i.e., NCLT).