Author: Nikhil Sukhija
In
late 2016, highly anticipated Insolvency and Bankruptcy Code, 2016 (“IBC”) was
enacted by the Parliament of India with the motive of bringing uniformity to
India’s scattered bankruptcy laws. The IBC is an all-encompassing law dealing with
the bankruptcy of corporations, partnerships and also individuals. The IBC has
also established the Insolvency and Bankruptcy Board of India (“IBBI”) as the
nodal agency for regulating all the matters relating to insolvency and
bankruptcy.
We
will be uploading series of articles on the functioning of IBC and impact of
COVID-19 on the provisions of the code. The
basic structure of Code is as follows:
On Whom does IBC applies?
The
IBC applies to the following:
·
Any Company
incorporated under the Companies Act, 2013;
·
Any Limited
Liability Partnership (“LLP”) firm registered under the Limited Liabilities
Partnership Act, 2008;
·
Any partnership
registered under the Partnership Act, 1932; and
·
Any individual
person.
When will an Insolvency Resolution
Process trigger?
An
insolvency resolution process under the IBC may be initiated by any creditor in
the event there is a minimum default of INR 1,00,00,000 (Rupees One Crore Only)
(as per the notification dated 24.03.2020) of such creditor’s debt by the
debtor. Such an application can be filed by an operational creditor or a
financial creditor before the National Company Law Tribunal (“NCLT”) of the relevant
jurisdiction.
An
appeal from any order or judgment of the NCLT, within the time specified
therein, will lie with the National Company Law Appellate Tribunal (“NCLAT”).
Further, appeals from the NCLAT will lie with the Supreme Court.
A
debtor is any entity or an individual who owes any liability or obligation in
respect of a claim which is due from any person and includes a financial debt
and operational debt. If the debtor is either a company or an LLP, then such a
debtor is referred to as a corporate debtor.
Default
is defined as non-payment of debt when whole or any part or instalment of the
amount of debt has become due and payable but has not been repaid by the
debtor.
Categories of Creditors
The
IBC provides for 2 (two) main categories of creditors i.e:
1. Financial Creditors
A
financial creditor is any person to whom a financial debt is owed to. In
such an event, the relationship between the financial creditor and the debtor
is a pure financial contract, such as a loan. A financial debt is a debt along
with interest, if any, which is disbursed against the consideration for the
time value of money. The following is an indicative list of what may be
considered as a financial debt.
·
Money borrowed
against repayment of interest.
·
Money raised
against any accepted credit facility.
·
Any amount
raised through transactions like forward sale or purchase agreements.
Financial
creditors may either be secured creditors or unsecured creditors. The main
difference between secured and unsecured financial creditors is that in the
event of liquidation and asset distribution proceedings, secured creditors are
given a higher priority than unsecured creditors.
When
compared to operational creditors, the procedure for financial creditors to
initiate insolvency proceedings is a lot easier. The IBC allows financial
creditors to make an application to the NCLT directly and such financial
creditors will only need to show that there is a default. It is also important
to note that only financial creditors constitute the committee of creditors,
and no operational creditor can be part of this committee.
It
is pertinent to mention that home buyers have been included within the
definition of financial creditors.
2. Operational Creditors
The
term operational creditor has been defined as any person to whom operational
debt is owed or to whom such debt has been assigned. Operational debt has been
defined in the IBC as a claim in respect of the provision of goods or services,
including employment or dues payable to any governmental authority. An
operational creditor, while filing an application for corporate insolvency
resolution before the NCLT against an operational debtor, will also have to
prove that there is no dispute which exists between the operational creditor
and the debtor with respect to the amounts due.
The
Supreme court, in the case of Mobilix Innovations Pvt Ltd v. Kirusa
Software Private Limited[1] held
that while determining if a dispute exists with the debtor with regards to the
payment of any debt, the NCLT will be required to see only if there is a
dispute and that the NCLT may not go into the merits of such dispute.
Working of Corporate Insolvency
Resolution Process
The
process of insolvency has been divided into 2(two) parts. They are:
The
Corporate Insolvency Resolution Process (“CIRP”) – During this process,
the financial creditors investigate the corporate debtor to determine whether
it is viable to continue its business. The creditors also come up with a plan
to restructure the corporate debtor. The various steps involved in a CIRP are:
·
Application to
the NCLT
·
Initiation of
the insolvency process
·
Imposition of
Moratorium
·
Appointment of
interim insolvency resolution professional
·
Appointment of
the committee of creditors
·
Appointment of
the resolution professional
·
Approval of the
resolution plan
Liquidation
Process: – In the event that the CIRP fails, the financial creditors have the
option to wind up the corporate debtor and liquidate and distribute its assets
in the order of liquidation preference prescribed under the IBC.
Conclusion
The
IBC has taken its first steps to regularize the insolvency process in India. It
has amended over 11 legislations in India, bringing about one of the most
significant changes to commercial laws in India in recent times.
Disclaimer: This article is meant to be informative and should not be treated as professional advice. For any legal or financial clarifications or suggestions, please contact the undersigned author , or you may reach out to us at protalkz03@gmail.com.
Nikhil Sukhija
Contact: 9555604055
Email: protalkz03@gmail.com
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