In November 2016, the highly anticipated Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted by the Indian Parliament with the intention of bringing uniformity to India’s scattered bankruptcy laws. The IBC is an all-encompassing law that deals with the bankruptcy of not only corporations, but partnerships and individuals as well. To this effect, the IBC has also established the Insolvency and Bankruptcy Board of India (“IBBI”) as the nodal agency to regulate all matters relating to insolvency and bankruptcy with an intent to complete insolvency resolution process in a fast and transparent manner.

In our effort to simplify the IBC, we are releasing a series of posts analyzing the various practical aspects of the IBC.

In our first post for this series, we seek to provide an overview of the IBC, its applicability and a brief description about the insolvency resolution process for corporate entities.

I. WHO DOES IT APPLY TO?

The IBC applies to the following:

  • Any Company incorporated under the Companies Act, 2013;
  • Any other company incorporated by any special statute;
  • 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.

II. WHEN WILL AN INSOLVENCY RESOLUTION PROCESS TRIGGER?

An insolvency resolution process under the IBC can be initiated by any creditor in the event there is a minimum default of INR 1,00,000 (Rupees One Lakh Only) 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. The NCLT will consider the following elements before admitting such an application:

  • Existence of a debt;
  • Existence of default; and
  • Notice of default (in the event the application is filed by an operational creditor).

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 creditor, for the purposes of the IBC may be an operational creditor or a financial creditor. The qualification for being an operational or a financial creditor with respect to a debtor has been explained in paragraph III below.

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 installment of the amount of debt has become due and payable but has not been repaid by the debtor.

III.CATEGORIES OF CREDITORS UNDER THE IBC

The IBC provides for 2 (two) main categories of creditors i.e: (a) financial creditor; and (b) operation creditors.

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 (time value of money refers to the concept that money acquired sooner or held onto longer has a greater worth or potential worth due to the possible accumulation of interest or return on investment). 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.
  • Money raised through instruments like bonds, notes, debentures or similar instruments.
  • 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. Further, during the liquidation process, secured financial creditors are given the same priority of repayment as workmen and employee dues and are given a higher priority that other operational creditors, who are treated as unsecured creditors for the purposes of liquidation.

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 the recently passed Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 has also included home buyers 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, in addition to the requirements mentioned in paragraph II above, 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 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.

IV. HOW DOES THE CORPORATE INSOLVENCY RESOLUTION PROCESS WORK?

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: The creditor will need to file an application with the NCLT for initiating insolvency resolution proceedings. The NCLT shall be required to either accept or reject the application within 14 days of filing the application.
  • Initiation of the insolvency process and suspension of management: Once the application has been accepted by the NCLT, the management of the debtor is suspended and the intermediate authority, appointed by the NCLT and referred to as the ‘interim insolvency resolution professional’ takes over the management of the corporate debtor. Further, as soon the application for CIRP is admitted by the NCLT, a moratorium takes effect on the corporate debtor, which prohibits the continuation or initiation of any legal proceedings against the debtor, the transfer of its assets, or the enforcement of any security interest.
  • Appointment of the committee of creditors: The interim resolution professional investigates the claims made by the creditors and constitutes the committee of creditors within 30 days of the NCLT admitting the application for CIRP.
  • Appointment of the resolution process: The committee of creditors then appoints an independent person as the resolution professional, referred to as the Insolvency Resolution Professional (“IRP”) to take over the management of the corporate debtor for the remainder of the CIRP.
  • Approval of the resolution plan: Within 180 days of the initiation of the CIRP, the IRP is required to draw up a resolution plan for the revival of the corporate debtor. Such a plan needs to be approved by creditors holding at least 75% of the debt of the corporate debtor.

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 change to commercial laws in India in recent times. However, the 22 months of this nascent legislation have been ridden with controversies and speedy resolutions. It has also become a very important tool for banks to regularize multitudes of non-performing assets plaguing the country’s economy. Within 7 months of the enactment of the IBC, the Reserve Bank of India released a list of 12 companies which held  about 25% of the gross non-performing assets of the country.

With more than 11% of all loans in India being terms as bad loans, the IBC has become the need of the hour. The IBC has brought a plethora of changes to insolvency laws in India and aims to reduce the amount of bad loans that has saddled the economy over the last few years. We are beginning to see this through various companies successfully concluding their insolvency process. The first successful case of a CIRP was that of Bhushan Steel wherein TATA Steel agreed to purchase Bhushan Steel for Rupees Thirty-Two Thousand Five Hundred Crores.

With many more insolvency resolution processes in the pipe line, only time will tell if the IBC will prove to be a successful tool with its objective of streamlining the insolvency process in India.