Corporate Insolvency Resolution Procedure

THE TERM ‘INSOLVENCY’ AND ‘BANKRUPTCY’:

In common parlance, insolvency and Bankruptcy are often used
interchangeably. However, there is a thin line of difference between these
two words.
Insolvency is a financial situation, where an entity or an individual is unable
to meet the financial obligations due to excess of liabilities over assets,
whereas, Bankruptcy is a legal procedure where the court of law passes
orders with respect to insolvency of an individual or entity and consequently
passes orders for its resolution.
Thus, an individual or an entity can be insolvent without being bankrupt and
insolvency can lead to bankruptcy if the insolvent individual or entity is
unable to overcome the financial catastrophe.

CORPORATE INSOLVENCY - MEANING:

A company is declared insolvent if it is unable to pay its debts to its
creditors. Following are two ways to check for corporate insolvency:

1. The Cash-Flow Test: Is the company currently or in future will it be

unable to pay its debts as and when they fall due for payment?
2. The Balance Sheet Test: Are the value of the company’s assets
less than the number of its liabilities after taking into account as-yet
uncertain and future liabilities?

If the answer to any of the above question is positive then the company is
declared insolvent. A company can be declared as insolvent also if:

 A creditor who is owed more than £750 has served a formal demand
for an undisputed sum at the company’s registered office, the debt has not
been paid for three weeks
 A judgment or other court order has not yet been satisfied.

CORPORATE INSOLVENCY RESOLUTION

PROCESS:
 Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism
for creditors. If a corporate becomes insolvent, a financial creditor, an
operational creditor, or the corporate itself may initiate CIRP.

 Financial Creditor could be any person to whom a business debt is

owed or a person to whom such amount is legally assigned or transmitted.
For example: Banks or other financial institutions

 Operational Creditor could be any person to whom an operational

debt is owed and includes any person to whom such amount has been
legally assigned or transferred for goods or services done by them. For
example: vendors and suppliers, employees, government etc.

The Insolvency and Bankruptcy Code, 2016 provides a provision for an

application for insolvency or bankruptcy of start-ups, individuals,
partnership firms, limited liability partnership, and companies. The Code
has provided a slab of default amount in each category however the final
amount is to be notified by the Government as the trigger point to initiate
the proceeding while keeping in view the fluctuation of the economy. It is
important to understand that the said amount is not the minimum or
maximum fixed amount of debt default but it is a ‘range’.
CIRP is initiated after making an application. CIRP is the process through
which it is determined whether the person who has defaulted is capable of
repayment or not. If a person is not capable of repaying the debt the
company is restructured or liquidated. Following are the steps to be
followed for resolution or liquidation of a corporate:
1. Application to NCLT: A financial or operational creditor of the company
or the company itself can apply to the National Company Law Tribunal
(NCLT). The application is made to admit that the Company (Corporate
Debtor as per IBC) is into corporate insolvency resolution process. For this
the creditor needs to show the default payment of a debt which exceeds
INR 1,00,000 and within 14 days the NCLT has to pass an order either
admitting or denying the application. There are different obligations that a
financial and an operational creditor have to comply with when making their
applications before NCLT. A financial creditor needs to submit the record of
the default whereas an operational creditor needs to first make a demand
for his unpaid debt. On the basis of an ongoing dispute, it is open to the
corporate debtor to defend the claim.
 2. Interim Resolution Professional & Moratorium: When a corporate
debtor is admitted into the CIRP, it suspends the board of directors. Also,
the management is placed under an independent ‘interim resolution
professional’.  Further, from this point onward the management ceases to
have any control over the company affairs till the end of the CIRP.
Simultaneously, a moratorium becomes effective which prohibits:

 Continuation or initiation of any legal proceedings against the

corporate debtor
 Transfer of its assets
 Enforcement of any security interest
 Recovery of any property from it by an owner
 Suspension or termination of the supply of essential goods and
services, the moratorium lasts till the corporate debtor is in CIRP

However, the moratorium does not extend to key business contracts

entered into by the corporate debtor.
3. Verification and Analysis of Claims: At this stage, interim resolution
professional will summon and verify the claims made the creditors and also
classify them. After that, within 30 days of acceptance into CIRP, will form a
Committee of Creditors (COC) which comprises of all the financial creditors
of the corporate debtor.
4. Appointment of Resolution Professional: Within seven days of the
forming the committee, the COC will have to either resolve to appoint the
interim resolution professional as a resolution professional or to replace the
interim resolution professional by another resolution professional.
5. Approval of the “Resolution Plan”: A resolution plan for the revival of
the company must be approved within 180 days from the commencement
of CIRP by creditors. The NCLT can extend this period by another 90 days.
Any person, management, the creditors or a third party can propose such a
plan. Resolution professional is responsible to ensure that the plan meets
the criteria set out in Insolvency and Bankruptcy Code, 2016.

 If a plan is approved within this period and sanctioned by

NCLT: The approved resolution plan becomes binding on the corporate
debtor and its employees, members, creditors, guarantors and other
stakeholder involved in the resolution plan. It is the duty if the resolution
professional to obtain all necessary approvals required under any law for
 the time being in force within one-year from the date of approval by
adjudicating authority.
 If no resolution plan is approved within the said period: In case
the resolution plan is not approved then NCLT is obliged to order the
liquidation of the corporate debtor. After the approval of liquidation, COC
appoints the liquidator to sell the assets of the corporate debtor and share
them among the stakeholders. The distribution is made according to
section 53 of the Insolvency and Bankruptcy Code 2016