The Insolvency and Bankruptcy Code, 2016 (Code) provides for a forum to oversee all insolvency and liquidation proceedings for Individuals, Small and Medium Enterprises and Corporates. With an intent to resolve corporate distress in a time-bound manner, the Code has defined Corporate Insolvency Resolution Process (CIRP).
Default in paying whole or part of the amount of debt or interest due (min value of INR 1 lakh).
Who can file the application?
- Financial creditor – To whom a financial debt is owed
- Operational creditor – To whom an operational debt is owned and includes Government & Employees/Workmen
- Corporate debtor – Who owes debt to others (the Corporate entity itself)
Process of CIRP?
- Eligible applicant shall make an application to the National Company Law Tribunal (NCLT) for initiation of CIRP
- NCLT shall ascertain the existence of a default and accordingly admit / reject an application.
- CIRP shall commence from the date of admission of the application and an interim resolution professional (IRP) is appointed by NCLT.
- The time-limit for completion of CIRP is 180 days which can be extended once but to be mandatorily completed within 330 days.
- The NCLT declares moratorium which act as a shield for the Corporate Debtor (CD) during CIRP period by prohibiting any legal proceedings or recovery of assets from Corporate Debtor.
- The IRP shall make a public announcement calling the creditors of the CD to submit the claim with proof. Based on the claim filed, a Committee of Creditors (CoC) is constituted which primarily comprises of Financial Creditors.
- In the first meeting of CoC, the committee will confirm the appointment of IRP as Resolution Professional (RP) or replace with a new RP.
During CIRP period:
- Powers of the Board of Directors are suspended. IRP/RP shall manage the operations of the CD as a going concern.
- RP shall prepare Information Memorandum and invite prospective investors to submit resolution plan for CD.
- On approval of resolution plan by CoC, the RP submits such plan to the NCLT for approval, pursuant to which it is implemented by new investor.
- In case if no resolution plan is submitted or the submitted resolution plan is not approved either by CoC or NCLT within stipulated time, the liquidation of CD is initiated.
- The Code also provides for Fast Track Corporate Insolvency Resolution Process with a need for faster resolution of cases with less complex issues and a CD with assets and income below a level as notified by the Central Government.
The Code has faced several practical and procedural bottlenecks and is still evolving over time. The recent amendments related to capping of CIRP time limit, fair distribution of recovery, tax relaxations, etc. are in right direction and are aimed at bridging the gaps between theoretical idolism and practical implementation. Rightly implemented, the Code has potential to bring discipline in business practices followed in India on par with more developed markets over long term.
(With inputs from Aditya Agarwal. The writers are senior Tax and IBC professionals at EY. Views expressed are personal.)