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Corporate Insolvency at a Glance

September 9, 2020     by Nidhi Kapoor

The objectives of the IBC Code, is ‘reorganisation and insolvency resolution’ which implies ‘revival and not liquidation’. When a company falls into insolvency, the first step is to try and resolve and not liquidate. The Code particularly deals with ‘Corporate Insolvency’ and ‘Corporate Liquidation’, including Voluntary Liquidation.

Corporate Insolvency Resolution Process (CIRP) is a process laid down in the Code for reviving the company (i.e the corporate debtor) from its state of insolvency. It is almost akin to putting the company under an immunity from attack of creditor actions, while the debtor and/or the creditors prepare a revival plan.

CIRP is a creditor-driven process i.e whether the corporate debtor will survive or will be liquidated, depends on the creditors, i.e. the committee of creditors.

How is CIRP initiated?

An application for CIRP can be filed by a financial creditor, an operational creditor or the corporate debtor itself.

What happens when CIRP is initiated?

Once an application filed and admitted by the Adjudicating Authority (NCLT), a ‘Moratorium period’ is enacted i.e a period during which no creditor can initiate recovery actions against the corporate debtor and the corporate debtor too, cannot alienate its assets. The Code provides a moratorium of 180 days or 270 days as a result of a one-time extension of maximum 90 days. When the order of commencement of CIRP is passed, the NCLT appoints an Insolvency Professional to act as the Interim Resolution Professional in whose hands the control of the corporate debtor is transferred (the Board is suspended from exercising powers).

What are the immediate steps after initiation of CIRP?

What will happen to affairs of Corporate Debtor (CD) when a Resolution Professional is appointed?

Prior to the appointment of a Resolution Professional (RP), and Interim Resolution Professional (IRP) is appointed. Pursuant to Section 17 of the IBC Code, 2016, the management of affairs of the CD are vested in the hands of the IRP. Unlike Liquidation, there is no vesting of ownership of property or assets in the hands of the IRP or RP. Thus, the IRP/ RP typically perform the following functions:

  • Management of affairs of the CD
  • Ensuring the entity remains as ‘Going Concern’
  • Act as a Custodian of assets of the CD
  • Working closely with the creditors of the CD
  • Conducting the CIRP process per the statutory timelines prescribed under the Code
  • Preparation of the Information Memorandum (IM)
  • Facilitating a Resolution Plan

How to form Committee of Creditors (CoC)?

A creditor is a person/entity to whom a debt is owed. IBC Code, 2016 categorizes creditors into:

Financial Creditors: A person to whom a Financial debt is owed and includes any person to whom debt has been legally assigned or transferred.

Operational Creditor: A person to whom an Operational Debt is owed and includes any person to whom debt has been legally assigned or transferred.

Committee of Creditors (CoC) is a committee consisting of Financial Creditors of the Corporate Debtor. This body forms the decision-making body in the CIRP. A financial creditor shall be deemed to be the member of CoC from the date his claim is admitted by the IRP. The voting power of the CoC is based on the amount of admitted claim in that respect.

What is a Resolution Plan?

Resolution Plan is one of the most important elements of the entire process of resolution. It is a plan proposed by a resolution applicant (person/ entity making such proposal) to resolve the insolvency of the corporate debtor and should ideally cover aspects like the Payments to operational and financial creditors, Management of affairs of the corporate debtor, Payment of CIRP costs, plan to revive the company and it should be in accordance with Section 30 of the IBC Code, 2016.

Resolution Plan Accepted or Rejected, what next?

The resolution plan has to first clear the test of IBC Code, 2016 and once the IRP/RP is confident that the plan abides by the basic legal requirements, the plan is thereafter placed before the CoC for consideration and approval, which may accept or reject the plan.

Where the Resolution Plan is accepted, the RP files an application before the Adjudicating Authority for approval of the plan ratified by the Committee, following which, Adjudicating Authority may, upon its discretion accept or reject the same. When the resolution plan receives a go ahead from both CoC and Adjudicating authority, the plan becomes operative and shall bind all the stakeholders involved.

Where the resolution plan is rejected by the Committee of Creditors or by NCLT, or in case the RP does not receive any resolution plans at all, the Corporate Debtor goes into liquidation by order of the NCLT.

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