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Initiation Of Application For Resolution: The Related Provisions In The Insolvency And Bankruptcy Code

The primary focus of the Code is to ensure revival and continuation of corporate debtor from its own management. The code is a beneficial legislation which puts corporate debtor back on its feet.--- The Hon’ble Supreme Court (Swiss Ribbons Pvt. Ltd. vs. Union of India)

Introduction
Insolvency and Bankruptcy Code, 2016 came into effect in December, 2016 and was made operational to corporate debtors. Its initial experience of implementation was encouraging as the attitude of borrowers also started to improve. Insolvency and Bankruptcy is a complete code in itself and is exhaustive in the matters dealt with therein.

In Innovative Industries v. ICICI Bank[1], it was held that the Code is Parliamentary law that is exhaustive code on the subject matter of insolvency. It is covered in Entry 9 List III of Seventh Schedule. Section 238 of the Insolvency and Bankruptcy Code, 2016 states that the Code has an overriding effect over other laws. National Company Law Tribunal (NCLT) is the Adjudicating Authority and National Company Appellate Law Tribunal (NCLAT) is Appellate Authority for corporates. Section 179 (1) of the Code states that Debt Recovery Tribunal (DRT) will be adjudicating authority for individuals and firms.

Difference Between Insolvency And Bankruptcy

Insolvency is a state where the liabilities and obligations of an individual or an organization exceeds its assets and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment. Hence, it is the inability of the persons or companies to pay their dues as and when they become payable. Here, the organization is not able to pay its outstanding debts. If insolvency cannot be resolved, the assets of the business/debtor can be sold to repay the outstanding debt.

Per Contra, Bankruptcy is defined as a state when a person is legally declared incapable of paying his due and payable bills. When an individual is unable to pay his outstanding debts, then he generally files for bankruptcy. Hence, insolvency is a state whereas bankruptcy is the legal implication of that state.

Bankruptcy is of two types:
  1. Reorganization Bankruptcy:
    When people tend to restructure the repayment plans to pay them easily is called reorganization bankruptcy.
     
  2. Liquidation Bankruptcy:
    When the debtor tends to sell of its certain assets to pay off its debts, this process is called liquidation bankruptcy.
    When an individual/firm/corporate turns insolvent and he has no means left to raise cash to pay off its debts, it is in a state of insolvency. When he notifies the adjudicating authority regarding the same to declare itself as legally incapable, the process is called bankruptcy. Here, the entity asks for the help from the government to pay off its debts to the creditors.

Scheme Of Initiating Applications Under The Code

Section 4 of the Insolvency and Bankruptcy Code, 2016 provides that the matters relating to the insolvency and liquidation of corporate debtors will apply only where the minimum amount of default is one lakh rupees. And it can extend to maximum one crore rupees. Part II of the Insolvency and Bankruptcy Code, 2016 lays down the following two independent stages:
  1. Corporate Insolvency Resolution Process (Sections 4 and 6 to Section 32) and
  2. Liquidation (Sections 33 to 54 and 59)
In Corporate Insolvency Resolution Process (CIRP), the financial creditors assess the viability of debtor’s business and options for its revival and rehabilitation. If the CIRP fails and financial creditors decide that the business of the debtor cannot be carried on in a profitable manner and it should be wound up, the debtor’s business undergoes a liquidation process.
In liquidation process, the assets of the debtor are realized and distributed by the liquidator in accordance with the provisions of Insolvency and Bankruptcy Code, 2016.

Persons Who May Initiate Corporate Insolvency Resolution Process

Section 5(5) of the Insolvency and Bankruptcy Code, 2016 provides for the definition of corporate applicant. As per this provision, it includes a corporate debtor; a member or a partner of the corporate debtor who is authorized to make an application for Corporate Insolvency Resolution Process (CIRP), under the constitutional document of corporate debtor and an individual who is in charge of managing operations and has control and supervision over financial affairs of corporate debtor.

Section 6 of the Code provides that where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate Corporate Insolvency Resolution Process (CIRP). Default means any non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the corporate debtor. Also, the process can be initiated by a financial creditor or an operational creditor. Financial debt means claim in respect of the money, which is due to the creditors whereas Operational debt can be defined as claims in respect of goods and services and not money.

Initiating Corporate Insolvency Resolution Process By Financial Creditor(S)- Section 7

Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for initiation of CIRP by a financial creditor.

Filing an application against corporate debtor before the Adjudicating Authority: Section 7(1) provides that financial creditor, either by himself or jointly with other financial creditors, or any other person on the behalf of the financial creditor may file an application for CIRP when the default has occurred; before the National Company Law Tribunal (NCLT). The explanation appended to Section 7(1) makes it clear that default includes the default in respect of financial debt not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

In Dr. H N Nagaraj v. Edelweiss Asset Reconstruction Co Ltd[2], it was held that if there was a debt and there is default, the application is required to be admitted and the reasons for the default are not relevant. In this case, the applicant argued that the restructured loan installments were to be paid by selling immovable properties. It was held that these could not be sold as the financial creditor had obtained injunction from the Court.

Furnishing of information by the financial creditor: Section 7(3) of the Code mandates that the financial creditor shall furnish the proof of default along with the application of initiating insolvency resolution process and the name of resolution professional proposed to act as interim resolution professional in respect of the corporate debtor. The main aim of this provision is to avoid frivolous applications.

Time frame for ascertaining the existence of a default: Section 7(4) states that after filing the application, the National Company Law Tribunal (NCLT) shall ascertain the existence of the default from the records of an information utility or on the basis of other evidence within 14 days from the receipt of the application.

Admission or Rejection of Application: Section 7(5) of the Code states that if the NCLT is satisfied as to the existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed resolution professional, it shall admit the application. But if the Tribunal finds that default has not occurred or the application is incomplete or disciplinary proceedings are pending against a resolution professional, it may reject the application under Section 7(5) (b) of the Code. Before rejecting the application, the Tribunal shall give notice to the applicant to rectify the defect within seven days.

Commencement of Corporate Insolvency Resolution Process: Section 7(6) of the Code states that insolvency process shall commence from the date of admission of the application under Section 7(5) of the Code and the Tribunal shall pass a communication order within seven days of the admission or rejection of such application:
  1. To the financial creditor and the corporate debtor if the application is accepted;
  2. To the financial creditor if the application is rejected.

Persons Not Entitled To Make Application-Section 11

Section 11 of the Code provides for those persons who are not eligible to make an application for initiating Corporate Insolvency Resolution Process. According to this provision, the following persons are not entitled to make an application:
  1. A corporate debtor undergoing a corporate insolvency resolution process;
  2. A corporate debtor having completed the corporate insolvency resolution process twelve months preceding the date of making an application;
  3. A corporate debtor or financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making an application;
  4. A corporate debtor in respect of whom a liquidation order has been made.
The explanation appended to Section 11 makes it clear that for the purpose of Section 11, a corporate debtor includes a corporate applicant in respect of such corporate debtor.

Simplifying Section 11 Of The Ib Code, 2016

Thus according to Section 11 of the Insolvency and Bankruptcy Code, 2016, a corporate debtor which is undergoing a Corporate Insolvency Resolution Process (CIRP), (at the time of such application) or has completed the process in the preceding twelve months is not entitled to file an application for initiating the insolvency resolution process. Clause (a) an (b) of Section 11 ensures that corporate debtors do not have the repeated recourse to Corporate Insolvency Resolution Process in order to delay the payment of debts or to keep assets out of the reach of creditors.

Similarly, a corporate debtor or financial creditor who has violated any of the terms of the resolution plan that was approved twelve months before making an application for initiating process is also not entitled to make an application for initiating Corporate Insolvency Resolution Process. Clause (c) aims at ensuring that corporate debtors or financial creditors do not abuse the corporate insolvency resolution process for extraneous considerations in addition to ensuring compliance with the terms of resolution plan. Lastly, a corporate debtor, in respect of which, a liquidation order has been passed is not allowed to initiate insolvency resolution process again. Thus, Clause (d) ensures the finality of the liquidation order.

Time Limit For Completion Of Insolvency Resolution Process- Section 12

Time limit for completion of Insolvency Resolution Process- Section 12(1) of the Code lays down that, subject to the provisions of sub section (2), the Corporate Insolvency Resolution Process shall be completed within a period of one hundred and eighty days from the date of admission of the application.

Extension of time- Section 12 (2) of the Code states that the Resolution Professional shall file an application to the National Company Law Tribunal to extend the period of Corporate Insolvency Resolution Process beyond one hundred eighty days, if he is instructed to do so by a resolution passed at the Committee of Creditors by a vote of sixty-six per cent of the voting shares.

Section 12(3) of the Code provides that on the receipt of the application, if the NCLT is satisfied that the subject matter of the case is such that the corporate insolvency resolution process cannot be completed within 180 days, it may order to extend to extend the duration of such process beyond 180 days by such other period as it thinks fit but such period cannot exceed 90 days.

Withdrawal Of Application Under Section 7,9 Or 10- Section 12a

Section 12A was added by the Insolvency and Bankruptcy Code (Second Amendment Act, 2018). The newly added section provides that the Adjudicating Authority may allow the withdrawal of application admitted under Section 7, 9 or 10 of the Code; on an application made by the applicant with an approval of ninety per cent voting share of the Committee of Creditors, in such manner as may be specified.

Inferences And Conclusion
  1. All in all, it can be extrapolated that a financial creditor, operational creditor or the corporate debtor itself may initiate an application for initiating Corporate Insolvency Resolution Process under the appropriate provisions of the Code. (CIRP)
  2. The Corporate Insolvency Resolution Process has to be completed within 180 days as per the provisions of Section 12; but an extension of 90 days can be granted; as provided by the same provision.
  3. The application can also be withdrawn by passing a resolution at the meeting of Committee of Creditors which should have at least 90 per cent of voting share as per Section 12 A of the Code.
  4. The financial creditor, while submitting the application to the Adjudicating Authority, must submit the same with utmost care and in the best manner prescribed.
  5. Corporate Insolvency Resolution Process (CIRP) cannot be initiated against a debtor, who is already undergoing the process or has undergone the same in the preceding twelve months.
End-Notes:
  1. (2018) 1 SCC 407 =143 SCL 625= 84 taxmann.com 320 (SC)
  2. (2018) 148 SCL 447 = 84 taxmann.com 326 (NCLAT)
Written By:
  1. Rishabh Taneja And
  2. Harnoor Johal

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