Since the introduction of the Insolvency and Bankruptcy Code in 2016 (“IBC”), there has been significant focus on the way the IBC deals corporate insolvency, and rightly so. The IBC envisages resolution of such corporate insolvencies in a two-stage procedure. The first stage being the corporate insolvency resolution process (“CIRP”) and the second being the liquidation process.
The first stage, CIRP becomes particularly relevant for the following main objectives that it seeks to achieve:
- Efficient and Quick resolution of insolvency;
- Creation of a platform for all creditors of a debtor to take collective actions relating to the insolvency of the debtor;
- Reorganisation or restructuring of the debtor in order to prevent bankruptcy;
- Prevention of any substantial reduction in the value of the debtor.
In this blogpost, we have attempted to provide a detailed chart for all the steps involved in the first stage of resolution of corporate insolvencies, being the CIRP.
The events that would trigger initiation of an insolvency resolution process are discussed in greater detail in our previous blogpost titled IBC 2016: Overview of the Insolvency and Bankruptcy Code, 2016. The following is a step chart of the steps for the initiation of a CIRP:
Step 1: Filing a CIRP petition before the NCLT
A petition for CIRP (“CIRP Petition”) can be initiated either by an operational creditor or by a financial creditor before the National Company Law Tribunal of the relevant jurisdiction (“NCLT”). Who qualifies as an operational creditor and who qualifies to be a financial creditor has been discussed in greater detail in our previous blogpost titled IBC 2016: Overview of the Insolvency and Bankruptcy Code, 2016.
The key difference between a CIRP Petition filed by an operational creditor and a financial creditor is that an operational creditor is required to provide a demand notice of 10 (Ten) days to the debtor prior to filing a CIRP Petition before the NCLT. There is no such requirement for a financial creditor.
However, a pre-requisite to the initiation of a CIRP petition is that there should be an undisputed debt prior to the initiation of CIRP. In the event that there is a dispute with relation to the existence of a debt, the NCLT shall be required to reject the CIRP petition at the admission stage itself. The Supreme Court has reiterated this in the case of Transmission Corporation of Andhra Pradesh v. Equipment Conductors and Cables Limited.
Step 2: Acceptance of the CIRP petition by the NCLT
The NCLT is time bound to either accept or reject the CIRP petition within a period of 14 (Fourteen) days. The NCLT, while coming to the decision of accepting or rejecting an application, merely needs to look at whether or not there exists an undisputed debt and whether the CIRP Petition is complete. At this stage, the NCLT cannot look into the merits of the CIRP petition. In the event the NCLT accepts the CIRP petition, it shall make a public announcement about the CIRP being initiated against the debtor.
Upon accepting CIRP petition, the NCLT will place a moratorium over the debtor for the entire duration of the CIRP. It is pertinent to note that upon the commencement of the moratorium period, the following actions with respect to the debtor shall be prohibited:
- Initiating or continuing of any legal proceedings against the debtor;
- The transfer of the debtor’s assets to any third party;
- Any enforcement of the debtor’s security interest.
Step 3: Appointment of an interim IP by the NCLT
The NCLT, upon accepting the application for CIRP, shall appoint an interim insolvency professional (“IP”) within 14 (Fourteen) days of accepting the CIRP petition. The interim IP will take over the assets of the debtor and will appoint the committee of creditors (“CoC”) (discussed in detail in Step 4 below). The interim IP may be appointed for a maximum period of 30 (Thirty) days.
The interim IP will also need to make a public announcement with respect to their appointment within 3 (Three) days from the date of his/her appointment. The public announcement must provide for a minimum period of 14 (Fourteen) days for the creditors to provide proof of their claims.
Step 4: Constitution of the CoC by the interim IP
Upon collecting the information and proof of the claims provided by the creditors, the interim IP shall classify the debts into operational debts and financial debts. Thereafter, the interim IP will constitute the CoC who will consist of all the financial creditors of the debtor; after this point, the CoC remains the final authority in making all the decisions regarding the CIRP. All decisions taken by the CoC needs to be approved by creditors holding more than 75% (Seventy Five Percent) of the debtor’s financial debt. It is pertinent to note that operational creditors do not form part of the CoC.
The CoC will conduct its first meeting within 7 (Seven) days of its constitution. In order to come to a decision, the CoC has the right to demand any financial information with respect to the debtor and the interim IP shall be required to provide the CoC with such information within 7 (Seven) days of such demand.
Step 5: Appointment of RP by the NCLT
The CoC, after being constituted and in any event, within 30 (Thirty) days from the time the interim IP is appointed, will nominate a Resolution Professional (“RP”). The nomination will need to be submitted to the NCLT. The NCLT shall, after taking the opinion of the Insolvency and Bankruptcy Board of India, either appoint or reject the RP nominated by the CoC. It is relatively common for the CoC to appoint the interim IP as the RP.
Thereafter, the RP will take over the responsibility of managing the operations of the debtor from the interim IP and will assist the CoC during the CIRP. The RP will be appointed for the entire duration of the CIRP. The RP will need to collate all the financial information of the debtor from the information utility and provide the same to the CoC.
The RP will also need to create an information memorandum (“IM”) of the debtor. The IM is a document detailing the business affairs of the company and includes the financial and operational details of the debtor. It is the base document on which the resolution plan is formulated.
Step 6: Preparation of the resolution plan
Upon collection of all the information and the IM, a resolution plan for the resolution of insolvency of the debtor is to be formulated. A resolution plan is a proposal that seeks to address the insolvency issues faced by the debtor. It contains the various steps and actions that the debtor will need to undertake in order to come out of insolvency. Such a plan may include a corporate restructure or selling off certain components of the debtor.
The RP is required to make an announcement inviting prospective applicants prepared to formulate the debtor’s resolution plan. This is required to be done within 75 (Seventy Five) days from the commencement of the CIRP. Once the RP has finalised the list of applicants, the same will need to be forwarded to the CoC. Only after the CoC has approved the applicant, can he/she be appointed to formulate the debtor’s resolution plan.
A resolution plan can be prepared by any party, unless expressly prohibited by law. Section 29A has been inserted into the IBC which prevents the debtor itself or any of its guarantors of the debtor from submitting a resolution plan. Barring these exceptions, any party may file a resolution plan, including but not limited to the interim IP, the RP and the CoC.
Step 7: Acceptance of the resolution plan by the CoC
Once the resolution plan has been formulated, the same shall be forwarded to the CoC for approval. Any resolution plan that has been formulated will be brought into effect only after it has received approval from more than 75% (Seventy Five Percent) of the CoC.
Once the resolution plan has been approved by the CoC, it will be required to be filed before the NCLT for its approval. In the event that the CoC has not accepted or approved any resolution plan within 180 (One Hundred and Eighty) days from the commencement of CIRP, the NCLT shall have the right to initiate liquidation of the debtor in line with section 53 of the IBC. The time limit of 180 (One Hundred and Eighty) days may be extended to a maximum of 270 (Two Hundred and Seventy) days at the discretion of the NCLT.
Step 8: Submission of the resolution plan to the NCLT
Once the CoC has approved the resolution plan, the same needs to be submitted to the NCLT. The NCLT will review the resolution plan to ensure that it is in line with the provisions of law and to ensure that there is no arbitrariness in the resolution process. Once the NCLT has reviewed the resolution plan and is satisfied with the same, it shall give its approval for the same.
The CoC, upon receiving approval from the NCLT, may commence implementing the resolution plan. While implementing the resolution plan, the CoC may make offers to investors (if permitted by the resolution plan). While such offers are made, the debtor or its promoters do not have the right object to the actions of the creditors which may include handing over assets to any third party investor.
The entire process of CIRP has been designed in order to increase the efficiency of the process of corporate insolvency. It aims to do this by providing strict time lines that needs to be adhered to by all parties. The entire process of CIRP has been designed to be completed within a period of 270 (Two Hundred and Seventy) days.
It is commendable to note that the NCLT has taken a proactive role on this front with the NCLT approving 45 (Forty Five) resolution plans in the 2 (Two) years of the IBC’s existence, of which 12 (Twelve) are in the process of implementation. This is a promising start which will hopefully lead to greater acceptance of CIRP by all stakeholders.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.