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Corporate Insolvency Resolution Process: CIRP

On 6th October, 2022, the Mumbai Bench of the National Company Law Tribunal (NCLT) allowed a petition under Corporate Insolvency Resolution Process (CIRP) against First Flight Couriers filed by the company's operational creditor Srinidhi Comprint, as the company failed to repay its des of about Rs. 1.44Cr.

The Insolvency and Bankruptcy Code, 2016 ('IBC') lays down the provisions for conducting insolvency or bankruptcy of individuals, partnership firms, LLP and companies. This article puts lights on what CIRP is all about.

What is corporate insolvency resolution process (CIRP)?

The Corporate Insolvency Resolution Process ('CIRP') is a recovery mechanism for the creditors of a corporate debtor. Corporate insolvency is a state where a corporate person fails to pay debt, whether whole or any part or instalment, when due and payable.

Who is a corporate person?

A corporate person means:
  1. A company as defined under the Companies Act, 2013;
  2. A Limited Liability Partnership as defined under the Limited Liability Partnership Act, 2008; or
  3. Any other person incorporated with limited liability under any law It does not include any Financial Service Provider.
However, Financial Service Provider could be notified for the purpose of their insolvency and liquidation proceedings, under section 227 of the Code.

Who can initiate CIRP?

CIRP may be initiated by:
  1. A financial creditor u/s 7:
    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 along with interest, if any, disbursed against consideration of time value of money. It also includes those enumerated in section 5(8)(a) to (i) of the Code, such as money borrowed against the payment of interest, amount of any liability in respect of any lease or hire purchase contract, any amount raised for a transaction having commercial effect of borrowing such as amount raised from allottee under a real estate project etc.
  2. An operational creditor u/s 9:
    Any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Operational Debt means claim arising in relation to supply of goods and services. It also includes claims in relation to employment or dues payable to Central Government, State Government or any local authority.
  3. Corporate applicant of corporate debtor u/s 10: Corporate Applicant means:
    1. corporate debtor: A corporate debtor is a corporate person who owes a debt to any person.
    2. a member or partner of the corporate debtor who is authorized to make an application for the CIRP under its constitutional document or
    3. an individual who is in charge of managing the operations and resources of the corporate debtor; or
    4. a person who has the control and supervision over the financial affairs of the corporate debtor.

Where an application can be filed under CIRP?

An application can be filed to National Company Law Tribunal, having territorial jurisdiction over the place where the registered office of the corporate person is located.

CIRP can be withdrawn either before admission by the Adjudicating Authority or even after admission. The Adjudicating Authority may allow withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant through the resolution professional, with the approval of 90 percent of voting share of the committee of creditors. The application for withdrawal may also be made by the applicant through interim resolution professional even before the constitution of committee of creditors.

What is the minimum default amount for initiating CIRP?

The Government vide notification dated 24th March, 2020, has increased the minimum amount of default to ₹ 1 crore.

What documents are required to be submitted along with the application for CIRP?

The form of application to be filed by the financial creditor, operational creditor and corporate debtor are provided under Form 1, Form 5 and Form 6 respectively of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The documents to be submitted r along with the application are -

Financial Creditor: Record of default recorded with information utility or other record or evidence of default as specified and the name of the proposed interim resolution professional.

Operational Creditor: A copy of the invoice demanding payment or demand notice delivered by the operational creditor, affidavit stating that no dispute of the debt has been raised by the corporate debtor and a copy of certificate from financial institution, record with information utility or any other proof, confirming that there is no payment of unpaid debt.

Corporate Debtor: Information relating to its books of account, name of the proposed interim resolution professional and 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 filing of application.

Form Stakeholder category:
  1. Form B Operational Creditor
  2. Form C Financial Creditor
  3. Form CA Class of Creditors
  4. Form D Workman or employee
  5. Form E Authorized representative of workmen/employees
  6. Form F Other Creditors

Can a corporate debtor undergoing CIRP file an application for initiating CIRP against its own debtors?

Under section 11 of the Code a corporate debtor undergoing CIRP can file an application. But a corporate debtor undergoing liquidation, cannot file an application for initiation of CIRP on itself.

Section 11: Persons not entitled to make application.
The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely:
  1. a corporate debtor undergoing a corporate insolvency resolution process [ or a pre-packaged insolvency resolution process]; or
    1. a financial creditor or an operational creditor of a corporate debtor undergoing a pre-packaged 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
    (ba) a corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A, 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
  4. a corporate debtor in respect of whom a liquidation order has been made.
[Explanation I]. For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.

[Explanation II. For the purposes of this section, it is hereby clarified that nothing in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another corporate debtor.]

What is time limit within which the CIRP should be completed?
As per section 12(1) of the Code, the CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum time within which CIRP has to be mandatorily completed, including any extension or litigation period, is 330 days.

To extend the time period beyond 180 days the committee of creditors is required to pass a resolution, with sixty-six percent of the total voting share, to extend the CIRP. Thereafter, the resolution professional needs to file an application to the Adjudicating Authority seeking approval for such extension.

Corporate Insolvency Resolution Process Costs
The Insolvency Resolution Process Costs is defined to mean those costs indicated in section 5(13) of the Code read with regulation 31 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

It includes amount of any interim finance along with cost of raising such finance, fee and expenses of interim resolution professional or resolution professional ratified/approved by the committee of creditors, fee of the authorized representative representing class of creditor, cost incurred for running the corporate debtor as going concern, amount due to suppliers of essential goods and services etc.

The applicant is required to fix the expenses incurred or to be incurred by the interim resolution professional. In case, the expenses are not fixed by the applicant, the Adjudicating Authority shall fix the expenses. Such costs/expenses shall be borne by the applicant which shall be reimbursed by the committee of creditors to the extent ratified by it. Further, the amount of the expenses ratified by the committee of creditors shall form part of insolvency resolution process costs.

The committee of creditors shall fix the expenses to be incurred on or by the resolution professional and such expenses shall form part of insolvency resolution process costs.

Interim Resolution Professional
Appointment: The Adjudicating Authority appoints the insolvency professional proposed by the financial or operational creditor in their application, as the interim resolution professional on the insolvency commencement date. However, where the name of the insolvency professional is not proposed in the application filed by an operational creditor, the Adjudicating Authority makes a reference to the Board for the recommendation of an insolvency professional, who may act as an interim resolution professional.

The Board within ten days of the receipt of a reference from the Adjudicating Authority, recommends the name of an Insolvency Professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.

Term: The term of an interim resolution professional continues till the date of appointment of the resolution professional under section 22

The powers of the board of directors or the partners of the corporate debtor as the case may be, shall stand suspended upon the appointment of the interim resolution professional. Such powers shall be exercised by the interim resolution professional and resolution professional, as the case may be. As per section 17(1)(c) of the Code, the officers and managers of the corporate debtor shall report to the interim resolution professional. Upon appointment of resolution professional, the resolution professional shall exercise the same powers and perform duties vested or conferred on interim resolution professional, in terms of section 23(2) of the Code.

Duties of Interim Resolution Professional:
  1. Collate information pertaining to the operations, assets and finances of the corporate debtor to understand its financial position.
  2. Gather all the claims made by the creditors against the corporate debtor.
  3. Form Committee of Creditors (COC)
  4. Manage the finances and govern the operation of the corporate debtor as a going concern until a Resolution Professional is appointed by the COC
  5. Take custody of all the assets, tangible or intangible, in the name of the corporate debtor until such process is in motion.
Any other duties as directed by the Insolvency and Bankruptcy Board of India (IBBI).

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