All about Corporate Insolvency Resolution Process (CIRP) under IBC, 2016.
Updated: Sep 23, 2020
It is absolutely natural for businesses, companies and corporates to face major setbacks due to internal or external factors of its environment, but not every setback can and should result in liquidation but instead can be revived through recovery techniques and procedures. Keeping the same vision, Insolvency and Bankruptcy Code, 2016 (IBC) was formed with the aim, inter alia, to"....promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues.... ."
Further, IBC consolidates and amends laws relating to reorganization and insolvency resolution of individuals, partnership firms & corporate persons in a time bound manner for maximization of value of their assets, to balance the interests of stakeholders. It also significantly changed the order of priority of payment dues. One such major alteration is that now workmen’s dues are given priority over government dues. Further, the code aims to enable faster turnaround of businesses as well as smoother disposal & settlement of insolvency cases.
Thus, it will not be out of place to state that, resolution under IBC fixes the broken businesses or corporates and heal them to bloom back to life. Such revival is a crucial step to save the creditors as well as the interest of the corporate person.
Insolvency and Bankruptcy Code was enacted and enforced in 2016, replacing the Sick Industries Companies Act (SICA, 1985). IBC, 2016 is a creditor centric procedural model which allows the Financial Creditors, Operational Creditors, or the Corporate Applicant itself to initiate the Corporate Insolvency Resolution Proceedings (CIRP). The code further mandates that an insolvent company cannot undertake the liquidation process without going through CIRP. In a CIRP, a number of options for the revival of the insolvent company are chalked out and considered. In cases where CIRP fails, the process of liquidation can be initiated thereafter.
Corporate Insolvency Resolution Process (CIRP)-
CIRP is the standard process to initiate the proceeding for a Corporate Debtor under IBC, 2016. It is a recovery cum repair mechanism for the companies to minimise risk for creditors. This mechanism is used when a corporate becomes insolvent and a financial creditor, an operational creditor or the corporate itself proceeds for the resolution.
CIRP is said to be initiated after the application is made. Initially, It is determined that the person who has made the default is capable of repayment or not. It is processed by the NCLT (National Company Law Tribunal) appointed Insolvency Resolution Professional (IRP) through the evaluation of the assets and liabilities. If the person is found to be able to repay the debt, the company is restructured and if it is found not in the capacity to pay back then the liquidation is processed. The Insolvency Resolution Professional (IRP) acts as the intermediary and help sick units and financial institutions including banks with a smooth takeover or liquidation process.
In accordance with the CIRP, the company would be required to arrange for fresh funds for the operation or may also look for a buyer to sell the company as a going concern. The outstanding debts may be realised through the buyer company (Resolution Applicant) submitting a Resolution Plan to take over and pay off the remaining debts. In case of non-submission of the resolution plan or non-approval of the plan by the committee of creditors (COC), the CIRP process is deemed to have failed. In this condition, the company proceeds for Liquidation.
Stages under CIRP-
1. Filing of Application before NCLT for Initiation of CIRP:
As stated earlier, a CIRP can be initiated by a financial creditor, an operational creditor or the corporate applicant himself. Provisions related to these have been dealt in detail below-
CIRP initiated by a Financial Creditor-
IBC clearly lays down provisions related to CIRP initiated by a financial creditor. The code defines a financial creditor as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. This definition essentially encompasses persons entering into purely financial relationship with a company such as loan or debt security. Further, a descriptive definition of 'financial debt' has also been provided in the code which includes a debt along with interest.
Now, as per Section 7 of IBC, a financial creditor can file an application before the adjudicatory body (either solely or jointly with other financial creditors) for CIRP in case a default takes place. A number of requirements need to be fulfilled after which the adjudicatory body can either admit or reject the application. If the application is accepted, then CIRP commences from the date of admission of application. The adjudicatory body is also required to give notice to the applicant in case of any defect in his/her application before rejecting it.
CIRP initiated by an Operational Creditor-
IBC defines an operational creditor as a person to whom operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. In other words, it is a person who renders any service or supplies goods for a consideration, but did not receive any consideration in return.
Under the code, firstly an operational creditor is required to issue a demand notice to the corporate debtor for payment of any unpaid dues in case of default. In turn, the corporate debtor needs to either repay the debt or bring any existence of a dispute into notice of the operational creditor (within 10 days).
After expiry of the said time period, if the default still persists, the operational creditor can file an application before the adjudicatory body for initiation of CIRP. Section 9 of IBC lays down certain requirements to be fulfilled and then the adjudicatory body can either reject or admit the application. If the application is accepted, then CIRP commences from the date of admission of application. The provision requires the adjudicatory body to duly communicate its decision to operational creditor as well as corporate debtor.
CIRP initiated by the Corporate Applicant/Debtor-
In several cases, the corporate debtor applies for insolvency and procedure for this has been provided in detail.
An application for initiation of CIRP under Section 10 of IBC needs to be filed before the adjudicatory body for this purpose. Thereafter, the adjudicatory body can either admit or reject the application. If the application is accepted, then CIRP commences from the date of admission of application.
2. Appointment of Interim Resolution Professional (IRP) and Moratorium:
When an application is filed and the same is admitted by the adjudicatory authority, the CIRP commences. As an effect of this, three major steps are to be taken by the adjudicatory authority -
A moratorium prohibiting 1) continuation or initiation of any legal proceedings against the corporate debtor; 2) transfer of its assets; 3) enforcement of any security interest, 4) recovery of any property from it by an owner etc. is to be declared. The said moratorium lasts till CIRP continues.
An Interim Resolution Professional is to be appointed to undertake management of the company. From this point, company’s management is suspended and ceases to exercise any control.
A Public Announcement declaring the commencement of CIRP needs to be made. This is done to invite claims from other stakeholders.
The code lays down detailed requirements for the above-mentioned steps starting from Section 14 to Section 20 of the code. Most importantly, duties of the Interim Resolution Professional (hereinafter, IRP) have been laid down. One of the most important functions of the IRP is to manage the operations of the corporate debtor as a going concern and to take every step to preserve and protect the value of his property. This requirement goes in line with the basic object of the code.
3. Verification of Claims and Constitution of Committee of Creditors:
Following his appointment, one of the most important duties of an IRP is to receive and collate all the claims submitted to him by various creditors. This involves verification of all the bona fide claims made by creditors as well as determination of the financial position of corporate debtor. Thereafter, the IRP is required to constitute a committee of creditors.
A committee of creditors is a body consisting of only financial creditors of the company. The committee has a right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process. This is an important step as it helps in maintaining transparency in the CIRP.
4. Appointment of Resolution Professional:
After the constitution of a committee of creditors, the next important step is appointment of a resolution professional.
The code gives power to committee of creditors to appoint a resolution professional in order to undertake duties of the IRP thereafter. The committee can either appoint the IRP as resolution professional or replace the IRP with a new resolution professional.
A resolution professional has responsibility to conduct the CIRP as well as to manage the operations of corporate debtor.
Another major responsibility of the resolution professional is to prepare an information memorandum and to provide it to resolution applicants who then prepare a resolution plan keeping the information memorandum in mind.
Further, notably, the code provides for a number of transactions that cannot be undertaken by a resolution professional without getting prior approval of the committee of creditors.
5. Submission and Approval of Resolution Plan:
A resolution is nothing but the proposal that seeks to address the insolvency problems faced by the debtor. A resolution contains the initiatives to be taken up and actions that should be taken up by the debtor in order to normalise the solvency. It can include a plan for corporate restructuring or selling off certain components of the debtor.
RP is expected to then make an announcement inviting prospective prepared applicants to formulate the debtor’s resolution plan. This has to be processed within 75 days from the commencement of the CIRP procedure.
Section 29A bars the debtor himself or any of his guarantors from filing a resolution plan. Any Party other than the exception can file a resolution plan, including but not limited to the interim IP, the RP and the CoC.
After appointment of the resolution professional, he is required to carefully examine all the resolution plans submitted by various resolution applicants.
After ensuring that the requirements laid down under Section 30(2) are fulfilled, the resolution professional shall present selected plans to committee of creditors for its approval. The said approval is made by voting system where all the financial creditors exercise their right to vote and a minimum of 75% of the voting shares is required to approve a plan.
After this, the approved resolution plan needs to be submitted to the adjudicating body by resolution professional. Upon satisfaction, the adjudicatory body approves the plan and thereafter, it becomes binding on stakeholders involved in CIRP. Further, the adjudicating body also holds a power to reject a plan if it does not conform to the requirements.
Time is the essence of CIRP:
IBC, 2016 requires a resolution plan to be approved within a period of maximum 180 days (starting from the date of commencement of CIRP). However, if upon an application filed by the Resolution Professional, the Adjudicatory Authority is satisfied that the subject matter of the case is such that CIRP cannot be completed within 180 days, then an extension of maximum 90 days can be granted. If no plan is approved within this duration, the adjudicatory body can then order liquidation of corporate debtor.
The question that ‘whether the time period prescribed under section 12 is mandatory’ arose before NCLT. The tribunal opined that speed is of essence to the code and hence CIRP must be completed within the said prescribed duration i.e. 180 days. The tribunal further said that any extension can be granted only in exceptional matters and not otherwise.
Another important question which has time and again arisen is that whether any time period consumed in litigation would form part of a CIRP. The tribunal has answered this question in negative. It has opined in a number of cases that the time period consumed in litigation would not form part of the prescribed time period for CIRP prima facie.
A brief perusal of section 12 in consonance with its interpretation given in various case laws reveals that the power of adjudicatory bodies to grant extension has been restricted to a very large extent. On one hand, denial of such an extension can ensure expeditious disposal of CIRP, however, on the other hand, it can hamper justice in several cases. A CIRP has a number of steps involved which makes room for bona fide delays. Keeping this in mind, it becomes imperative to find a right balance between expeditious disposal of proceedings and effective delivery of justice.
Introduction of Section 10A:
The prevalent pandemic and the extraordinary situation it has created in not only seriously affecting the businesses as a whole by creating a stress situation, but also due to the disruption caused by the nationwide lockdown, all of which leading to likely defaults on the part of corporate persons, and thereby making them susceptible to be taken under the relevant provisions of Section 7, and 10 of the IBC as the case may be. Thus, with a view to prevent such a situation from happening and thereby pushing the businesses to insolvency, the Executive promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 which was published in the Gazette of India on 05.06.2020, whereby a new Section 10A, of which alone we are presently concerned, was inserted after Section 10 of the IBC, 2016.
Section 10A prevents an application from ever being filed for initiation of a CIRP under Sections 7, 9 and 10 of the Code for a default occurring on or after March 25 till September 25 or March 25, 2021, as the case may be. An explanation to the Section also provides that Section 10A of the Code shall not apply to any default committed under the said Section prior to March 25.
This necessarily implies that, CIRPs shall not be initiated for defaults occurring in this period. The debtor shall continue to remain in possession, and the board of the company would also not be suspended, and further, there will be no appointment of resolution professional. Also, the applications under Section 7, 9 and 10 of the IBC, which are filed for defaults which have occurred prior to March 25 shall continue and may be admitted on merit. CIRPs in such cases can clearly be ordered or continued. Further, since no other provisions of the Code are suspended, hence, ongoing CIRPs may continue, and resolution under Sections 30 and 31, and even withdrawal under Section 12A, may be permitted in accordance with the law.
However, even though the ordinance got promulgated only on 05.06.2020 and published in the Gazette of India, and in case the default had occurred on or after 25.03.2020 then in such a case, the Adjudicating Authority should desist from entertaining such an application, even though it was filed between 25.03.2020 and 05.06.2020, since the words and terms used in Section 10A make it clear that the interdiction imposed therein applies to all the applications ever in relation to the defaults arising on or after 25.03.2020 for a period of six months, extendable upto a period of one year.
NCLT tries the best possible to not reach a liquidation stage. Therefore this stage only commences when:
The failure on the part of the creditors committee to submit or approve any resolution plan within the timeline provided by the IBC or Adjudication Authority.
The resolution plan is not in compliance with the IBC.
The CoC decides to take the liquidation of the assets by the majority vote.
When the debtor disdains the resolution plan.
While the liquidation is processed, no suit can be filed by or against the corporate debtor. There is the only exception to this is, that the liquidator representing the corporate debtor is based on the permission of the NCLT. The liquidator shall be the same person as the Resolution Professional last replaced. The Liquidator so appointed shall constitute the liquidation estate comprising of all the properties, whether financial or immovable, of the corporate debtor. The claims of the creditors may be received, verified, admitted or rejected based on the final decision of the liquidator within a prearranged time.  Insolvency and Bankruptcy Code 2016, S 2(7).
 Insolvency and Bankruptcy Code 2016, S 2(20).
 Insolvency and Bankruptcy Code 2016, S 8.
 Insolvency and Bankruptcy Code 2016, S 13.
 Insolvency and Bankruptcy Code 2016, S 20.
 Insolvency and Bankruptcy Code 2016, S 18(b).
 Insolvency and Bankruptcy Code 2016, S 21.
 Insolvency and Bankruptcy Code 2016, s 22.
 Insolvency and Bankruptcy Code 2016, S 23.
 Insolvency and Bankruptcy Code 2016, S 29.
 Insolvency and Bankruptcy Code 2016, S 28.
 Insolvency and Bankruptcy Code 2016, S 30.  Insolvency and Bankruptcy Code 2016, S 31.
 Insolvency and Bankruptcy Code 2016, S 12.
 M/S J. K. Jute Mills Company Limited vs. M/S Surendra Trading Company” Company Appeal (AD No. 09 of 2017).
 Punjab National Bank & Bhushan Power & Steel Limited C.A. No.152 (PB)/2018 in C.P. (IB)-202(PB)/2017.
 Siemens Gamesha Renewable Power Pvt. Ltd. v. Ramesh Kymal, IA 395/2020 in IBA 215/2020 (NCLT Chennai).
 Insolvency and Bankruptcy Code 2016, S 14.
(This Article is authored by: 1. Nimisha Shrivastava and 2. Ansh Kesharwani during their internship with S&D Legal Associates)
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