Earlier the courts have to be approached for insolvency and winding up process under the Companies Act. Application had to be filed before the Company Law Board or Court for insolvent bank to wind up. Later on came the RDBD and SARFAESI Courts for winding up. In order to avoid such overlapping of laws, Insolvency and Bankruptcy Code, 2016 (IBC) came into existence. This Code combines collections of existing laws which are amended in order to form a single Code.
IBC was established with the aim of consolidating and amending the laws for reorganization of the process of insolvency for corporate persons. Partnership firms and individuals in a limited time frame so that the maximum value of assets is ascertained. This will not only result in promoting entrepreneurship but also help in setting up of a legal framework for timely resolution of insolvency and bankruptcy supporting development of credit markets and encouraging entrepreneurship.
In order to achieve these objectives as given under the Preamble of IBC, a distinct feature of this Code is the Corporate Insolvency Resolution Process (CIRP), which shall be discussed in detail in this article.
Too many laws for recovery of Non-Performing Assets (NPAs) were introduced like the Companies Act, RDBD, SARFAESI, etc. In order to avoid clash between too many authorities for one single process, a consolidated and universal code was passed. DRTs were also not less in number, still there was immense delay in cases because a resolution process has to end in specific time. IBC gives time bound conclusions which is of specific importance. Also that there were many regulatory authorities for winding up procedure, therefore, one Insolvency and Bankruptcy Code Board of India (IBCBI) was formed.
When a company, consisting of around five banks, gives credit to the borrower, right of both the parties have to be protected. Rights of bank were highlighted under IBC along with the Insolvency Resolution Process (IRP). Under this Code, the DRT is approached when any individual or partnership firm is the borrower, whereas, NCLT is approached when company or LLP is a borrower.
Court will appoint an Interim Insolvency Resolution Professional (IIRP) when the creditors want a resolution plan to be made for the borrower. Then the valuation of assets, liabilities and creditors claim is made. If 66% of the creditors vote in favour of the Resolution plan, then it is deemed to have passed. Therefore the company shall revive as a going concern as it is actually given in the hands of the creditors. However if this does not work, then the company shall undergo liquidation.
CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)
The structure of the IBC has been divided into 5 parts. Part 1 is Preliminary. Part 2 is Insolvency Resolution Process and Liquidation for Corporate purpose. Part 3 is Insolvency Resolution Process and Bankruptcy for individuals and partnership. Part 4 is Regulation of insolvency professionals. Part 5 is Miscellaneous. Initiation of CIRP takes place under Section 7 by financial creditors, under Section 9 by operational creditors, under section 10 by financial creditors. There are people who are not authorized to make an application for initiating CIRP. This is illustrated under Section 11 of the IBC. Moreover, the Insolvency Resolution Process involves undergoing 9 different stages.
Stage 1 is the commitment of default wherein the creditors shall be given the right to present their claims which need to be recovered.
Stage 2 is the one wherein application with adjudicating authority has to be filed. Financial creditors, operational creditors, corporate debtors, itself file their own applications respectively wherein obviously liabilities are greater than assets of the companies. Such applications are filed to the bank who is the financial creditor. Since the bank provides finance to all then it can initiate the insolvency process by filing of the application in the DRT or the NCLT accordingly. Bank is at its discretion to either file single application or jointly on behalf of all the claimant. Record of the defaulter with evidence is presented along with the name of the Resolution Process (RP) or any other information that is required. It has to be ascertained within 14 days whether there is any default existing or not. After 14 days, such a decision shall be passed by the adjudicating authority. In case the application is rejected and the default is not accrued, appeal shall lie in the NCLT against this action. Once this is accepted, the insolvency resolution process (IRP) starts. All the communication shall then take place from the adjudicating authoritys end only.
Stage 3 is the appointment of IRP. The time period for completion of resolution process is fixed at 180 days. In case this is not complied with, then application shall be filed for extension up to further 90 days only, after which no such extension shall be granted. If still it is not resolved, then no majority decision shall be deemed to have been passed on resolution plan. Moratorium shall then take place then giving legal authorization to debtors for postponing the payment on temporary basis. Such declaration shall be made by the adjudicating authority that during such working period no person having any claim against the corporate debtor can be sued. NCLT cannot be approached during such moratorium. Corporate Resolution Process is deemed to have been started at this stage. All the claims arising shall be submitted to the IRP appointed. Public announcement for the claiming parties will also be made. Powers of an IRP is given under Section 17 of the IBC. He basically acts as a mediator who is managing this process.
Stage 4 is the formation of the Committee of Creditors (CoC) which clubbed with Stage 5 of confirmation by CoC of appointment. The IRP is entitled to select claimants for the formation of CoC. The claims against debtors are submitted by filing applications on behalf of the creditors. Financial creditors are bestowed with the right to vote in the CoC. A resolution plan will then be made within 180 days extendable up to 90 days. Every voters count shall be in proportion with its share in the company. 66% of voting is necessary. In case some people feel that the IRP appointed is biased then some other IRP can also be appointed for which 66% voting shall again be required.
Stage 6 is the preparation of information memorandum by IRP. Relevant information in physical or electronic form is given in the information memorandum. This also determines the financial position of the corporate debtor.
Stage 7 is the proposition of resolution plan by the creditor. Such a plan made by the creditors and submitted to IRP on the basis of the information memorandum. Resolution Plan will then be examined and costing will be ascertained.
Stage 8 is resolution plan approved by creditor. After examining the resolution plan, approval will be taken by the CoC. Such plan will then have to be passed by majority not less than 66% of the voting shares. The process till here will have to be concluded in 180 days extendable up to further 90 days.
Stage 9 is of the resolution plan approved by adjudicating authority or liquidation. The plan so approved will be submitted to the adjudicating authority by meeting all the necessary requirements. The approval of adjudicating authority is equally important and necessary once the plan is approved by CoC. With this said, the moratorium period will come to an end. Further appeal can be made in the NCLAT or simply the process of liquidation shall be undergone then.
The main reason behind the growth of an economy is its money market. IBC was formed for a more precise and clearing of outstanding claims within the limited time frame. Even though this statute is still developing and the people are not much aware about the CIRP process and how easy it is. It is to be noted that application to initiate CIRP should be under the guide of prescribed forms in proper and completed manner. NCLT Rule, 2016 should be followed in that regard.
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