Chapter 3 Corporate Insolvency Resolution Process – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Corporate Insolvency Resolution Process – CS Professional Insolvency Law and Practice Study Material
Question 1.
An application for Corporate Insolvency Resolution Process (CIRP) was filed by a Bank (being Financial Creditor) against RSI Ltd, which was admitted by the NCLT and an Interim Resolution Professional was appointed, the Committee of Creditors (CoC) was constituted. Vijay, who was a member of the suspended Board of Directors of RSI Ltd was neither allowed participation in CoC nor any information considered confidential was given, either by the resolution professional or the Committee of Creditors. Vijay made representations before the Adjudicating Authority to attend the meeting and for information/documents. Will Vijay succeed in his claim for attending the Meeting of Committee of Creditors and obtaining information about the CoC proceedings. (June 2019, 6 marks)
Answer:
The facts of the case are similar to the case of Vijay Kumar Jain v. Standard Chartered Bank, Supreme Court of India, 31st January, 2019.
In the matter, an appeal was filed with Supreme Court against orders rejecting the prayer of an erstwhile director for getting copy of the resolution plans from the Resolution Professional(RP). Both the NCLT and NCLAT ruled that appellant had no right to receive the resolution plans.
RP has contended that only the members of Committee of Creditors(CoC) are entitled to have resolution plans, as per Section 30(3) of the Code read with Regulation 39(2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Relying on the Notes on Clauses to Section 24 of the Code, they argued that the members of suspended Board of Directors are permitted to participate in CoC meetings only forthe purpose of giving information regarding the financial status of the debtor.
In this case the Supreme Court opined that the statutory scheme, makes it clear that though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings.
The Supreme Court expressly rejected the argument based on Notes on Clauses to Section 24 of the Code and noted that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21 (3)(iii) of CIRP Regulations. The Supreme Court said the expression ‘documents’ is a wide expression which would certainly include resolution plans.
Thus, members of erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of committee of creditors, must be given a copy of such plans as part of ‘documents’ that have to be furnished along with notice of such meetings.
Hence, Vijay will succeed in his claim for attending the meetings of CoC and obtaining information about the CoC proceedings.
Question 2.
Can an assignee of Financial Contract make an application under Corporate Insolvency Resolution Process? (Dec 2019, 3 marks)
Answer:
Yes, as per Rule 4(2) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, where an applicant for a Corporate Insolvency Resolution Process is an assignee or transferee of a Financial Contract the application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documents as may be required to demonstrate the assignment or transfer.
Question 3.
If there is NO Financial Creditor, how will the Committee of Creditors be constituted? (Dec 2019, 4 marks)
Answer:
As per Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, where the corporate debtor has no financial debtor or where all financial creditors are related parties of the Corporate Debtor, the Committee shall be formed comprising of the following members:
(a) 18 largest Operational Creditors by value.
(b) 1 representative elected by all workmen other than those workmen included under sub-clause (a).
(c) 1 representative elected by all employees other than those employees included under sub-clause (a).
Where the number of Operational Creditors is less than 18, the Committee shall include all such Operational Creditors.
Question 4.
What will be the consequence if Demand of Debt is disputed? (Dec 2019, 4 marks)
Answer:
If demand of debt is disputed and such dispute has been raised before the issuance of notice under section 8 of the Insolvency and Bankruptcy Code,
2016, the application shall not be admitted as the Adjudicating Authority is not empowered to go into the dispute. Thus, application can be admitted only if the demand of debt is undisputed.
The Supreme Court has categorically dealt with the definition of ‘dispute’ in the matter of Mobilox Innovations Private Limited v. Kirusa Software Private Limited by inserting the test of ‘plausible contention’ while analyzing the existence of dispute. The Supreme Court also clarified that the moonshine defence raised for the very first time by the corporate debtor after the service of the demand notice under section 8 of the Code does not qualify as ‘dispute’ within the definition of ‘dispute’ as per Section 5(6) of the Code. .
Question 5.
An Operational Creditor of a Company has made an application to National Company Law Tribunal (NCLT) for initiating Corporate Insolvency Resolution Process (CIRP) for non-payment his dues for long time. The NCLT ordered for commencement of CIRP. During the course of CIRP period Corporate Director has agreed to settle the dues of Operational Creditor and requested him to withdraw the CIRP.
Whether NCLT may allow the withdrawal of application admitted under Insolvency and Bankruptcy Code, 2016 in the above case. Will your answer differ, if the above application is made by Financial Creditor and subsequently Corporate Debtor settle its dues? (Dec 2020, 6 marks)
Answer:
Section 12A of the Insolvency and Bankruptcy Code, 2012 provides that the Adjudicating Authority may allow the withdrawal of application admitted under section 7 or Section 9 or Section 10. on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified.
Section 12A of IBC read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 specifically deals with withdrawal of CIRP after admission. Section 12A provides that CIRP can be withdrawn after admission, if the same is approved by ninety per cent voting share of the committee of creditors. Withdrawal may be allowed even after issuance of invitation for Expression of Interest.
Where Committee of Creditors (CoC) is not constituted, a party can approach NCLT for withdrawal of an application on settlement and where CoC is constituted, 90% of the voting share of the CoC agree for withdrawal. The answer would not differ if the application is made by the financial creditor and subsequently corporate debtor settles its dues.
Question 6.
Facts of the case :
SB Pvt. Ltd. supplied raw materials worth ₹ 15 lakh in January 2018 to a company named MR Ltd. MR Ltd. issued two cheques for ₹ 10 lakh, dated 15th April, 2018 and ₹ 5 lakh, dated 1st June, 2018, in favour of SB Pvt. Ltd. MR Ltd. had availed loan facility of ₹ 50 lakh from State Bank of India (SBI) and due to non-payment the account became Non-performing Asset (NPA) in the books of SBI. The SBI started recovery measures and lastly filed Corporate Insolvency Resolution Process(CIRP) against the MR Ltd. with the Adjudicating Authority (AA), The Adjudicating Authority admitted the CIRP filed by the SBI and the order of moratorium was passed under section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code) on 6th June, 2018. The first cheque of ₹ 10 lakh lodged by SB Pvt. Ltd. returned unpaid by its banker for the reason of insufficiency of funds. The SB Pvt. Ltd lodged a criminal complaint under section 138 of the Negotiable Instruments Act. 1881, (Nl Act) against MR Ltd. and its directors in the competent court having jurisdication on 1st June, 2018 (i.e. prior to declaration of moratorium by the AA). The second cheque of 15 lakh was also returned unpaid for the reason of insufficiency of funds and again a second criminal complaint was lodged by the SB Pvt. Ltd. against the MR Ltd. and its directors on 15th June, 2018 (i.e. after declaration of moratorium by the AA). The MR Ltd. and its Directors moved before the Adjudicating Authority and argued that during the period of moratorium proceeding petition under Section 138 of Nl Act was not maintainable. This was opposed by the SB Pvt. Ltd. but the Adjudicating Authority directed the SB Pvt. Ltd. to withdraw the complaint case filed under Section 138 of Nl Act treating it as a proceeding filed after order of moratorium with observation that such action amounts to deliberate attempt on the part of SB Pvt. Ltd. and sheer misuse of the process of law. Aggrieved from the order of the Adjudicating Authority, the SB Pvt. Ltd. preferred appeal before the National Company Law Appellate Tribunal (NCLAT). The NCLAT accepted the appeal and set aside the order of the Adjudicating Authority. Based on the above facts, answer the following questions:
(a) Citing relevant case law elaborate the decision of the Adjudicating Authority ? State with reason, if aggrieved party prefers an appeal, will they succeed. (June 2019, 10 marks)
(b) Section 14 of the Code states that after declaration of the moratorium no legal action can be maintained against the Corporate Debtor. What will be your answer when:
(i) Criminal action under section 138 of Nl Act filed before the declaration of moratoruim; and
(ii) Criminal action under section 138 of Nl Act filed after the declaration of moratorium. (June 2019, 10 marks)
(c) What effect of the declaration of the moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 ? (June 2019, 10 marks)
(d) Adjudicating Authority appoints Interim Resolution Professional(IRP) under the Insolvency and Bankruptcy Code-Enumerate his role, powers and duties. (June 2019, 10 marks)
Answer:
(a) The above case is similar to the facts as was in the cases of Shah Brothers Ispat (P.) Ltd. v. P. Mohanraj and Others, decided by the NCLAT, New Delhi, on 31st July, 2018.
Decision given by the Adjudicating Authority: The Adjudicating Authority opined that S.B. Pvt. Ltd. had violated order of moratorium issued by Adjudicating Authority, which was a deliberate attempt on part of the SB Pvt. Ltd. and sheer misuse of process of law. The S.B. Pvt. Ltd. was directed to withdraw the complaint filed under Negotiable Instruments Act, 1881 and, in case the S.B. Pvt. Ltd. had not withdrawn, action for violation of moratorium would be taken against it.
Reasons on chances of success of aggrieved party on Appeal: Section 14 of the Insolvency and Bankruptcy Code, 2016 was apparently misunderstood by the Adjudicating Authority. The language of Section 14 nowhere prohibits the initiation of criminal action. If there would have been the intention of the law maker to include the prohibition of criminal action against the corporate debtor, it would have been specifically mentioned in Section 14 itself.
The issue before the Appellate Tribunal is as under:
Whether the order of moratorium will cover a criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881, which provides punishment of imprisonment for a term which may extend to three years or with fine which may extend to twice the amount of cheque or with both?
The decision to be given in the case with logical reasoning, may be mentioned as under:
The company cannot be imprisoned, therefore aforesaid punishment under Section 138 of the Negotiable Instruments Act, 1881 cannot be imposed against the M.R. Ltd. However, fine can be imposed by a Court of competent jurisdiction on M.R. Ltd, if found guilty. The Directors of the M.R. Ltd. being parties can be imprisoned and also fine may be imposed on them.
The contention given by the M.R. Ltd. that the proceeding under Section 138 of the Negotiable Instruments Act, 1881 is covered by Clause of sub-section(l)(a) of Section 14 of the Code, therefore, proceedings against the M.R. Ltd. Including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority cannot proceed, is not acceptable by the Appellate Tribunal for the reasons being Section 138 of the Negotiable Instruments Act, 1881 is a penal provision, which empowers the Court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim.
Imposition of fine cannot held to be a money claim or recovery against the M.R. Ltd. nor order of imprisonment, if passed by the Court of competent jurisdiction on the Directors, they cannot claim benefit of moratorium under Section 14 of the Code. In fact no criminal proceeding is covered under Section 14 of the Code, so the question of moratorium on the criminal complaint under Section 138 of the Negotiable Instruments Act, 1881 stands nowhere.
(b) Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016,
prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
The question arises here is whether the order of moratorium will cover a criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881, which provides for imprisonment for a term which may extend to three years or with fine which may extend to twice the amount of cheque or with both. Imposition of the fine cannot held to be a money claim or recovery against the Corporate Debtor. Same way order of imprisonment, if passed by the Court of competent jurisdiction on the Directors, is not covered under Section 14 of the Code. In fact no criminal proceeding is covered under Section 14 of the Code.
Hence, filing of criminal complaint under section 138 of the Negotiable Instruments Act, 1881 either before or after the declaration of moratorium under section 14 of the Code will have no effect of moratorium.
(c) Section 14 of the Insolvency and Bankruptcy Code, 2016 deals with the declaration of Moratorium by the Adjudicating Authority after acceptance of the CIRP application filed by the financial/operational creditor. It provides as under:
1. Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:
(a) The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action underthe Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
2. The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.
3. The provisions of sub-section(l) shall not apply to
(a) such transaction as may be notified by the Central Government in consultation with any financial sector regulator;
(b) a surety in a contract of guarantee to a corporate debtor.
4. The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process.
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section(1) of Section 31 of the Code or passes an order for liquidation of corporate debtor under Section 33 of the Code, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.
(d) Role and Powers of Interim Resolution Professional
Section 17(1) of the Insolvency and Bankruptcy Code, 2016 provides that from the date of appointment of the Interim Resolution Professional:
(a) The management of the affairs of the corporate debtor shall vest in the interim resolution professional;
(b) The powers of the Board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;
(c) The officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional;
(d) The financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.
Section 17(2) of the Code further provides that the interim resolution professional vested with the management of the corporate debtor, shall
(a) Act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;
(b) Take such actions, in the manner and subject to such restrictions, as may be specified by the Board;
(c) Have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;
(d) Have the authority to access the books of accounts, records and other relevant documents of corporate debtor available with Government authorities, statutory auditors, accountants and such other persons as may be specified: and
(e) Be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.
Duties of Interim Resolution Professional – Section 18 of the Code provides that the person appointed as the Interim Resolution Professional shall perform the following duties:
- Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to,
- business operations for the previous two years;
- financial and operational payments for the previous two years;
- list of assets and liabilities as on the initiation date; and
- such other matters as may be specified.
- receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under Sections 13 and 15 of the Code;
- constitute a committee of creditors;
- monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;
- file information collected with the information utility, if necessary; and
- take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including,
- assets over which the corporate debtor has ownership rights which may be located in a foreign country;
- assets that may or may not be in possession of the corporate debtor;
- tangible assets, whether movable or immovable;
- intangible assets including intellectual property;
- securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
- assets subject to the determination of ownership by a court or authority;
- to perform such other duties as may be specified by the Board.
Question 7.
VN Pvt. Ltd. (VNPL) entered into a Sub-contract Agreement with KC Pvt. Ltd. (KCPL) to undertake road construction works. During the course of the project, disputes and differences arose between the parties and the same were referred for an Arbitration, Arbitration Award was delivered in favour of the KCPL VNPL challenged the Award by making an appeal under Section 34 of the Arbitration and Conciliation Act, 1996. Meanwhile, VNPL sent a demand notice under the Insolvency and Bankruptcy Code and also initiated insolvency proceedings against KCPL. The KCPL claimed that there is a dispute and the award has been challenged and adjudication of which is pending.
NCLT as well as NCLAT admitted the insolvency petition stating that challenge of award could not be considered to be ‘existence of dispute’ under the Insolvency and Bankruptcy Code. The matter reached the Supreme Court. What is ‘dispute’ within the meaning of the Insolvency and Bankruptcy Code, 2016 (IBC Code). Whether Award passed under Arbitration Act and challenged will be termed as existence of dispute under IBC Code. Comment with the help of decided case law. (June 2019, 12 marks)
Answer:
Section 5(6) of the Insolvency and Bankruptcy Code, 2016 defines the meaning of the word ‘dispute’. According to this, the term ‘dispute’ includes a suit or arbitration proceedings relating to (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.
The facts of the case is similar to the case decided by the Supreme Court of India in the matter of K Kishan v. Vijay Nirman Co. (P.) Ltd., 14th August, 2018.
The question before the Supreme Court was whether an arbitral award that has been challenged under Section 34 of the Arbitration and Conciliation Act, 1996 by the award debtor can form the basis for an action under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court overturned the decision of the National Company Law Appellate Tribunal (NCLAT) and held that the pendency of an application under Section 34 of the Arbitration and Conciliation Act, 1996 constitutes a ‘dispute’ under Section 8 of the Code. Accordingly, the challenge to the arbitral award bars the initiation of the corporate insolvency resolution process (CIRP), under Section 9 of the Code.
The Supreme Court had opined that operational creditors cannot use the Insolvency and Bankruptcy Code, 2016 either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. Such a company would be well within its rights to state that it is challenging the Arbitral Award passes against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist.
The Supreme Court decision overturned the position assumed by the NCLT and the NCLAT that proceedings pending under Section 34 of the Arbitration and Conciliation Act, 1996 do not imply the existence of a dispute and that an arbitral award that has been challenged does not constitute a record of the operational debt. The Court held that whilst the final adjudication of a challenge to an award is pending under the Arbitration and Conciliation Act, 1996, the provisions of the Code may not be legitimately attracted.
This in effect is a harmonious construction by the Supreme Court of the two legislations, considering situations where a corporate debtor is put under the resolution process before final adjudication of a challenge to an award under the Arbitration and Conciliation Act, 1996. If the arbitral award is subsequently set aside under Section 34 of the Arbitration and Conciliation Act, 1996, the damage to the corporate debtor would be irreparable and the legal position under the two legislations thereby, irreconcilable. Thus, the
Award passed under the Arbitration and Conciliation Act, 1996 shows that operational debt is disputed and the Code cannot be invoked in respect of operational debt where an Arbitral Award has been passed against corporate debtor, which has not yet been finally adjudication upon.
Question 8.
Facts of the case:
Richa Infrastructure Limited engaged in the construction of roads is in default in repayment of loans due to general slowdown in construction industry. Repeated follow-up by the financial institutions with the Corporate Debtor, ‘Richa Infrastructure Ltd.’ for submitting its specific plan for repayment of dues did not evoke any response.
One of the financial creditors filed a case against Richa Infrastructure Ltd. before the Debt Recovery Tribunal.
Richa Infrastructure Ltd. had issued some cheques to some Operational Creditors. All the cheques issued to creditors were dishonored/returned by the banker due to insufficient funds in the account. Consequently, Operational Creditors issued legal notices to Richa Infrastructure Ltd. with clear intimation that if due amount is not paid within 15 days from the date of receipt of legal notice, criminal complaint shall be filed against Richa Infrastructure Ltd. under the Negotiable Instrument Act, 1881 and criminal complaints were filed.
After a joint lenders meeting, all the financial institutions unanimously decided to apply under the provisions of the Insolvency and Bankruptcy Code, 2016 to the National Company Law Tribunal (NCLT) for starting the process of Insolvency Resolution. Their application was admitted by NCLT on 30th June, 2018 and orders were issued for commencement of a moratorium period of 180 days, appointment of an Interim Resolution Professional and issue of public announcement inviting claims from all concerned.
After public announcement and the responses thereto, following details were brought out:
- Financial debts due to unsecured creditors (F1) – ₹ 15 Crores.
- Workmen’s due for the period of 24 months preceding the liquidation commencement date (F2) – ₹ 25 Crores.
- Debts due to a secured creditor who has relinquished his security (F3) – ₹ 30 Crores.
- Amount due to the Central Government (F4) – ₹ 27 Crores.
- Debts due to a secured creditor afterthe enforcement of security interest (F5) – ₹ 36 Crores.
Insolvency Resolution Professional (IRP) approached the promoters, directors and officials of Richa Infrastructure Ltd. to provide the necessary information, documents, statutory records, books of accounts to verify the claims filed by creditors. The promoters, directors and officials of Richa Infrastructure Ltd. ignored the request of Resolution Professional.
M/s ANG & Associates, Chartered Accountants were the Statutory Auditors of Richa Infrstructure Ltd. They audited the accounts for the financial year end March, 2018 of Richa Infrastructure Ltd. and submitted the Annual Accounts for approval of the Board of Directors.
The Resolution Professional has appointed valuers and has received the valuation reports.
The Resolution Professional then started the efforts to get resolution proposals.
However during the normal resolution process period of 180 days, no resolution proposal could be finalized. The Committee of Creditors decided that Resolution Professional should get the extension as per the provisions of Insolvency and Bankruptcy Code, 2016.
Based on the above facts, answer the following questions:
(a) Can a Financial Creditor proceed against a Corporate Debtor under the Insolvency and Bankruptcy Code, 2016, when the matter is already pending before the Debt Recovery Tribunal? Examine the issue with the help of decided case law/laws. (Dec 2019, 8 marks)
(b) Is it necessary that application for extension of time period of 90 days must be filed before the completion of 180 days? What precautions should be taken by Insolvency Professional while applying to NCLT for extension of time period by 90 days? Examine the issue by referring to decided case law, if any. (Dec 2019, 8 marks)
(c) Can criminal proceedings under Section 138 of Negotiable Instrument Act, 1881 continue even after initiation of Corporate Insolvency Resolution process? Examine the issue by referring to decided case law, if any. (Dec 2019, 8 marks)
(d) Who will sign the Annual Financial Statements of the Corporate Debtor undergoing Corporate Insolvency Resolution Process? (Dec 2019, 8 marks)
(e) Can IRP take action against employees of the Corporate Debtor in terms of employment agreement? (Dec 2019, 8 marks)
Answer:
(a) Section 238 of the Insolvency and Bankruptcy Code, 2016 (the Code) provides that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
National Company Law Tribunal (NCLT), Ahmadabad Bench, in the case of Sarthak Creations Pvt. Ltd v. Bank of Baroda & Others held that the pendency of proceedings before Debt Recovery Tribunal (DRT) is no ground for not to commence Corporate Insolvency Resolution Process (CIRP) in view of non-obstante clause under Section 238 of the Insolvency and Bankruptcy Code, 2016.
In the case of PR Commissioner of Income Tax, New Delhi vs. Monnet lspat& Energy Ltd., the Delhi High Court held that the moratorium period under section 14 of the Code announced by the National Company Law Tribunal would also apply to the order of the Income Tax Appellate Tribunal in respect of the tax liability of the assesse.
Upholding the Delhi High Court Judgment (PR Commissioner of Income Tax, New Delhi vs. Monnet Ispat & Energy Ltd.) which held that moratorium under the Insolvency and Bankruptcy Code (IBC) will apply to the order of Income Tax Appellate Tribunal, the Supreme Court has observed that IBC will override anything inconsistent contained in any other enactment, including the Income Tax Act, 1961.
In view of the above, financial creditor can initiate proceedings under the Code even if the matter is already pending before DRT.
(b) Section 12(2) of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall file an application to the Adjudicating Authority to extend the period of the Corporate Insolvency
Resolution Process (CIRP) beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six per cent of the voting shares. However, reading the aforesaid provision, it appears that provision does not stipulate that such application for extension of period of CIRP is to be filed before NCLT within 180 days.
The very same issue had come up for consideration before the NCLAT in case of Quantum Ltd. v. Indus Finance Corporation Ltd. decided on 20th February, 2018, wherein NCLAT allowed an application filed after 180 days. However, the resolution of the committee of the creditors has to be passed within 180 days.
In view of the aforesaid judgment passed by NCLAT, when it becomes clear to the Resolution Professional that CIRP cannot be completed within the specified period of 180 days, he should propose to the Committee of Creditors for direction to seek extension of time from the Adjudicating Authority so that the process does not get derailed because of technical reasons.
On receipt of an application under sub-section (2) of section 12 of the Code, if the Adjudicating Authority is satisfied that the subject matter of the case is such that Corporate Insolvency Resolution Process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days. [Section 12(3)]
(c) Section 14(1) of the Insolvency and Bankruptcy Code, 2016 prohibits, inter alia, the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
From the provision and the words used therein, it becomes clear that the prohibition is not applicable to criminal proceedings which can continue to be pursued. The proceedings under Section 138 of the Negotiable Instruments Act, 1881 can thus continue even after initiation of CIRP. In the appeal of Shah Brothers Ispat (P) Ltd. Vs. P. Mohanraj before the NCLAT, the very same question arose for consideration. The question was whether the order of moratorium covers a criminal proceeding under section 138 of the Negotiable Instruments Act, 1881 which provides punishment of imprisonment or imposition of fine. It was held that the court of competent jurisdiction may proceed with the proceeding under Section 138 of Negotiable Instruments Act, 1881 even during the period of moratorium.
It is pertinent to note that Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits any proceeding or judgment or decree of money claim against the Corporate Debtor after the order of moratorium which is passed on the insolvency commencement date.
The Appellate Tribunal observed that Section 138 is a penal provision. The imposition of a fine cannot be held to be a money claim or recovery against the Corporate Debtor. As such the said section is not covered within the purview of Section 14 of the Insolvency and Bankruptcy Code, 2016. In fact, no criminal proceeding is covered under Section 14 of the Code.
(d) Section 17(1)(b)ofthe Insolvency and Bankruptcy Code, 2016provides that the powers of the Board of directors (Board) or the partners of the corporate debtor, shall stand suspended and be exercised by Interim Resolution Professional (IRP). It may be noted that though the powers of the Board are suspended, they are bound to provide all assistance to Insolvency Professional as only the powers of the Board are suspended and not their duties.
Further, Section 19 of the Insolvency and Bankruptcy Code, 2016 imposes an obligation on the personnel and promoters of the corporate debtor to extend all assistance and cooperation required by the IRP in the management of the affairs of the corporate debtor. Where the personnel of the corporate debtor or any other person required to co-operate with the IRP do not extend co-operation or assistance to the IRP, he may apply to the Adjudicating Authority for an order. The Adjudicating Authority may, by order, direct the personnel to comply with the instructions of the IRP or to provide information to the IRP. ‘Personnel’ includes the directors, managers, key managerial personal, designated partners and employees, if any, of the corporate debtor.
Moreover, the powers of the resolution professional do not include the power to represent the corporate debtor or initiate proceedings on behalf of the corporate debtor. The suspension is of the functioning of the Board and not of the directors. Signing of the Annual Report is a duty of the Board and the Board as a whole has to take the legal responsibility for the correctness of the report.
This is further clarified by the NCLAT in the matter of Steel Konnect (India) Pvt. Ltd. v. M/s. Hero Fincorp Ltd. that directors of the company do not cease to be directors, as they are not suspended but their function as ‘Board of directors’ is suspended.
The members of the Board also has to work under the Insolvency Professional which again means that if the professional asks them to consider the financial statement, they have to do so. In the aforesaid context, the existing directors of corporate debtor shall sign the financial statements of Corporate Debtor undergoing CIRP.
(e) Section 28(1 )G) and (I) of the Insolvency and Bankruptcy Code, 2016 provides that Resolution Professional, during the Corporate Insolvency Resolution Process (CIRP), shall not make any change in the management of the corporate debtor or its subsidiary, make changes in the appointment or terms of contract of such personnel as specified by the Committee of Creditors, without prior approval of the Committee of Creditors.
Thus, if action of IRP / RP has effect of change in management of corporate debtor or has the effect of making changes in appointment of such persons as may be specified by Committee of Creditors, he shall take approval of Committee of Creditors in terms of Section 28 (1 )(j) and (I) of the Code.
IRP may take action against an employee of corporate debtor for hindering the CIRP process if he does not provide assistance and co-operation to IRP. However, by way of abundant caution, IRP may also place the matter before Committee of Creditors before taking any action. IRP may also approach Adjudicating Authority under section 19(2) of the Code for necessary directions.
The Adjudicating Authority, on receiving an application Under Section 19(2) of the Code, shall by an order, direct such personnel or other person to comply with the instructions of the Resolution Professional and to co-operate with him in collection of information and management of the Corporate Debtor.
Question 9.
Naveen Kumar, a Financial Creditor filed an Insolvency Application under Section 7 of Insolvency and Bankruptcy Code, 2016 against M/s ABC Private Ltd. Corporate Debtor (Defaulter) before the National Company Law Tribunal on 1st July, 2018. National Company Law Tribunal after satisfying that the default has occurred and the application is complete in all respects and all the related compliances have been met, admitted the application, by an order passed on 10th July, 2018 and appointed Kamal Kishore as Interim Resolution Professional (IRP).
As per the Insolvency and Bankruptcy Code, 2016, state the following:
(i) Initiation date for the Corporate Insolvency Resolution Process.
(ii) Date of commencement of Insolvency.
(iii) Date of issuance of Public Announcement.
(iv) Tenure of Interim Resolution Professional.
(v) Last Date for Creditors to file their Claims.
(vi) Calculate Time Period for the completion of the Insolvency Resolution Process by the NCLT. (Dec 2019, 1 mark each × 6 = 6 marks)
Answer:
(i) As per Section 5(11) of the Insolvency & Bankruptcy Code, 2016 (the Code), initiation date for Corporate Insolvency Resolution Process is the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating Corporate Insolvency Resolution Process. So 1st July, 2018 would be the initiation date.
(ii) According to Section 5(12) of the Code, insolvency commencement date is the date of admission of an application for initiating Corporate Insolvency Resolution Process by the Adjudicating Authority Under Sections 7, 9 or Section 10, as the case may be. Accordingly, 10th July, 2018 is the insolvency commencement date.
(iii) As per Regulation 6 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, an Insolvency Professional shall make a public announcement not later than three days from the date of his appointment as an Interim Resolution Professional. Accordingly, 13th July, 2018 is the date of making public announcement.
(iv) Section 16(5) of the Code originally provided that the term of the Interim Resolution Professional shall not exceed thirty days from the date of his appointment, i.e., 9th August, 2018. But this sub-section was amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. Now the term of the Interim Resolution Professional continues till the date of appointment of the Resolution Professional Under Section 22 of the Code.
(v) As per regulation 12(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, subject to sub-regulation (2), a creditor shall submit claim with proof on or before the last date mentioned in the public announcement. However, as per regulation 12(2) a creditor, who fails to submit claim with proof within the time stipulated in the public announcement, may submit the claim with proof to the Interim Resolution Professional or the Resolution Professional, as the case may be, on or before the ninetieth day of the insolvency commencement date. Accordingly, 7th October, 2018 is last date of submission of claim. However, in manyjudgments, this time line is held to be directory in nature.
(vi) Section 12 of the Code states that any Insolvency Resolution Process shall be completed within a period .of one hundred and eighty days from the date of admission of the application to initiate the process. Accordingly, Corporate Insolvency Resolution Process should be completed by 6th January, 2019. However, the NCLT may on an application made by the Resolution Professional, under a resolution passed by the Committee of Creditors, by a vote of 66% of voting shares, after consideration provide extension which shall not exceed 90 days. Further, Insolvency and Bankruptcy Code (Amendment) Act, 2019 w.e.f. 6th August, 2019, has added a proviso to Section 12(3) stating that corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.
Question 10.
The M Ltd. (Corporate Debtor – CD) was engaged by ‘BB’ TV for conducting tele-voting for one of its prime program. M Ltd. in turn sub-contracted the work to the K Ltd. (Operational Creditor – OC) and issued purchase orders between October and December, 2013 in favour of the K Ltd.
The bills so raised were payable within 30 days of receipt by the M Ltd. It is pertinent to note here that a Non-Disclosure Agreement (NDA) was executed between the parties (CD and OC) on 26th December, 2014 with effect from 1st November, 2013. In view of non-payment of dues, a demand notice dated 23rd December, 2016 was sent by the OC under Section 8 of Insolvency and Bankruptcy Code, 2016. To this notice, the CD responded that there exists serious and bona fide disputes between the parties and that nothing was payable as the OC had been told on 30th January, 2015 that no amount would be paid to the OC since it had breached the NDA.
Based on the above facts examine by quoting relevant case, if any whether breach of Non-Disclosure Agreement amounts to default? (Dec 2020, 6 marks)
Answer:
The facts of the case is similar to that of the case of Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited, Civil Appeal No. 9405 of 2017. In this case the Supreme Court .opined that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. The Hon’ble Supreme Court was of the opinion that the breach of Non-Disclosure Agreement (NDA) was sufficient to construe the existence of a dispute to invalidate the CIRP application filed by the operational creditor.
According to Section 8(2) of the Code the corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in subsection (1) bring to the notice of the operational creditor, existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.
It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties.
According to Section 9(5) (ii) (d) of the Code, the Adjudicating Authority shall, within fourteen days of the receipt of the application, by an order, reject the application and communicate such decision to the operational creditor and the corporate debtor, if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility.
Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence
Question 11.
(a) ABC Housing Ltd. had initiated Corporate Insolvency Resolution Process against XYZ Infrastructure Ltd. (Corporate Debtor) under Section 7 of the Insolvency and Bankruptcy Code, 2016. The National Company Law Tribunal has dismissed the application as not maintainable in view of the fact that the winding-up proceeding against the Corporate Debtor had already been initiated by the High Court. Referring relevant case explain whether an application under Section 7 of the Code is maintainable when winding-up proceeding against the Corporate Debtor has already been initiated ? (Aug 2021, 6 marks)
(b) A Suspended Director of a Corporate Debtor, on whom Corporate Insolvency Resolution Process (CIRP) is ordered by National Company Law Tribunal (NCLT) made a police complaint against a Resolution Professional to stop his actions. Resolution Professional contended that all allegations made by suspended Director is frivolous and are made only to hinder him from doing the duty as Resolution Professional. The Resolution Professional filed an application with NCLT praying protection.
Referring relevant provisions and decided case clarify whether suspended Director of a Corporate Debtor can file a police complaint against Resolution Professional, if not who can initiate action against the Resolution Professional for alleged wrong doings. (Aug 2021, 6 marks)
Answer:
(a) In the matter of Indiabulls Housing Finance Ltd. vs. Shree Ram Urban Infrastructure Ltd., the Indiabulls Housing Finance Ltd. Appellant had initiated Corporate Insolvency Resolution Process against Shree Ram Urban Infrastructure Ltd. (Corporate Debtor) under Section 7 of the the Insolvency and Bankruptcy Code, 2016.
The National Company Law Tribunal, Mumbai Bench by impugned order dated 18th may, 2018 dismissed the application as no maintable in view of the fact that the winding-up proceeding against the Corporate Debtor had already been initiated by the Hight Court of Bombay.
Thus, the issue that fell for consideration before the National Company Law Appellate Tribunal was whether an application under Section 7 of the Code is maintainable when winding-up proceeding against the Corporate Debtor has already been initiated?
In the said appeal, the NCLAT examined judgements governing the issue to hold that the High Court of Bombay has already ordered for winding-up of Corporate, Debtor, which is the second stage of the proceeding, thus question of initiation of Corporate Insolvency Resolution Process’which is the first stage of resolution process against the same Corporate Debtor does not arise.
While arriving at its Judgement, the NCLAT relied on the case of Forech India Pvt. Ltd. vs. Edelweiss Assets Reconstruction Company Ltd. & Anr., wherein the NCLAT observed’ that if a Corporate Insolvency Resolution has started or on failure, if liquidation proceeding has been initiated against the Corporate Debtor, the question of entertaining another application under
Section 7 or 9 of the Insolvency and Bankruptcy Code (IBC) against the same very Corporate Debtor does not arise, as it is open to the ‘Financial Creditor’ and the ₹ Operational Creditor’ to make claim before the Insolvency Resolution Professional/Official Liquidator.
The NCLAT further opined that once second stage i.e. liquidation (Winding-up) proceeding has already been initiated, the question of reverting back to the first stage of Corporate Insolvency Resolution Process or preparation of Resolution Plan does not arise.
The view of the facts of the present case, the NCLAT concluded that as the High Court of Bombay had already ordered winding-up of Corporate Debtor and the same has been initiated, therefore, initiation of Corporate Insolvency Resolution Process against the Corporate Debtor did not arise.
(b) In the matter of Alchemist Asset Reconstruction Co. Ltd . vs. Hotel Gaudavan Pvt. Ltd., the IRP prayed for protection for all acts done by him in good faith and to save him from the frivolous allegations made against him in a FIR filed by a former director of corporate debtor.
The NCLT observed that if, there is any complaint against the Insolvency Professional then the IBBI is competent to constitute a disciplinary committee and have the same investigated from an Investigating Authority as per the provision of Section 220 of the Code. If, after investigation IBBI finds that a criminal case has been made out against the insolvency Resolution Professional then the IBBI has to file a complaint in respect of the offences committed by him. It is with the aforesaid object that protection to action taken by the IRP in good faith has been accorded by Section 233 of the Insolvency and Bankruptcy Code (IBC). There is also Completed bar of trail of offences in the absence of filling of complaint by the IBBI as is evident from a perusal of section’s 236(1) and (2) of the Insolvency and Bankruptcy Code (IBC).
Therefore, a complaint by a former director with the SHO, Police Station would not be maintainable and competent as the complaint is not lodged by the IBBI. The jurisdiction would vest with investigation Officer only when a complaint is filed by IBBI’.
Question 12.
A German Company (Operational Creditor) filed application under Section 9 of the Insolvency and Bankruptcy Code, 2016 against PQR Private Limited (Corporate Debtor) alleging that the ‘Corporate Debtor’ committed default in making the payment of certain operational dues. The Adjudicating Authority (National Company Law Tribunal), admitted the application. Before, National Company Law Appellate Tribunal (NCLAT) the Corporate Debtor has raised the question of jurisdiction of the National Company Law Tribunal in entertaining the application Linder Section 9 of the IBC, 2016. The Corporate Debtor referred to the Agreement reached between the parties and submitted that as per the Agreement and as the Office of the Respondent is in Germany, any suit or case is maintainable only in the Courts at Germany. No case can be filed in any Court in India. Discuss with reasoning whether the contention of the Corporate Debtor is correct. (Aug 2021, 6 marks)
Answer:
The present facts of the case is similar to the case of Excel Metal Processors Ltdvs. Benteler Trading International Gmbh & ANR. [NCLAT]. The Appellant (Corporate Debtor-Excel Metal) referred to the Agreement reached between the parties and submitted that as per the Agreement and as the Office of the Respondent is in Germany, any suit or case is maintainable only in the Court at Germany.
No case can be filled in any Court in India. Therefore, the Appellant has raised the question of jurisdiction of the National Company Law Tribunal, Mumbai Bench in entertaining the application under Section 9 of the Inslovency and Bankruptcy Code (IBC).
However, the NCLAT, New Delhi Bench was not inclined to accept the aforesaid statement as it is now settled and decided by the Appellate Tribunal in Binani industries Ltd. vs. Bank of Baroda & Anr. -Company Appeal (AT) (Insolvency) No. 82 of 2018 etc. Decided on 14th November, 2018 wherein it was held that ₹ Corporate Insolvency Resolution Process’/ insolvency proceedings is not a ₹ suit’ or a litigation’ or a ₹ money claim’ for any litigation; No one is selling or buying the ₹ Corporate Debtor’ a Resolution Plan’; It is not an auction; it is not a recovery, which is an individual effort by the creditor to recover the dues through a process that had debtor and creditor on opposite sides; and it is not liquidation. The object is mere to get resolution brought about, so that the Company do not default on dues.
Pursuant to Section 408 of the Companies Act, 2013, the National Company, Law Tribunal has been constituted in different States. In terms of the said provision, the Central Government has notified and vested the power on respective National Company Law Tribunals to deal with the matter within its territory, where the registered Officers of the Companies are situated.
As per Section 60(1) of the Insolvency and Bankruptcy Code (IBC), the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal person is located. As admittedly, the Registered Office of the t Corporate Debtor’ is situated in Mumbai, we hold that the National Company Law Tribunal, Mumbai Bench has the jurisdiction to entertain an application under Section 9 of the I & B Code and the Applicant cannot derive advantage of the terms of the Agreement reached between the parties.
For the reasons of aforesaid, and in absence of any merit, the Appeal was dismissed.
Question 13.
Images Gym Ltd. was granted credit facility of ₹ 100 lakh under consortium arrangements.
Under the consortium, there were five banks, and credit facility provided by the respective banks were as under:
A-One Bank Ltd. – ₹ 45 lakh,
Best Bank Ltd. – ₹ 20 lakh,
Good Deal Bank Ltd. – ₹ 15 lakh,
Credit Arrangers Bank Ltd. – ₹ 10 lakh and
Your Bank Ltd – ₹ 10 lakh
Among these the A-One Bank Ltd. was the leader.
Images Gym Ltd. was engaged in the business of manufacturing and trading of Gym exercise machines. However, due to poor demand of the products, the company could not sell out the machines and as a result the account of the company with respective banks were classified as Non-performing Advances (NPAs).
Apart from credit facility from the above banks, the company was also having outstanding dues of the creditor, which the company was not able to pay-off. The total amount outstanding of such operational creditors amounted ₹ 30 lakh.
The company has also not paid the salary to its employees and workers for the last 6 months and the total dues amounted to ₹ 10 lakh.
The leader of the consortium filed Corporate Insolvency Resolution Process (CIRP) with the Adjudicating Authority (AA) and proposed the name of Saket Sharma, as Interim Resolution Professional (IRP).
The AA accepted the application and appointed Saket Sharma as IRP and put moratorium.
The IRP constituted the Committee of Creditors (CoC) and first meeting of the CoC was called upon.
The operational creditors objected about the constitution of the committee and asked the IRP to include operational creditors also in the CoC, which the IRP denied.
The CoC observed that IRP is not discharging his functions properly and was reluctant in calling the expression of interest from Resolution Applicant(s), so they proposed forthe change of the existing IRP and appointment of the new Resolution Professional (RP) named as Anubhav Dutt.
The RP called the expression of interest from the eligible applicants and each proposal was placed before the CoC, but no consensus had arrived at. The initial period of 180 days was going to elapsed so the CoC through the RP sought extension which the Adjudicating Authority for further 90 days. The RP again called the expression of interest from other Resolution Applicants, but it was also not agreed upon by the CoC and after lapse of total 270 days, the Adjudicating Authority ordered for its liquidation and the present RP was appointed as Liquidator.
The Liquidator sold off the assets of the Company and realised only ₹ 150 lakh, whereas the outstanding dues of the various stakeholders remained as under.
| Dues of |
₹ in Lakhs |
| Fee payable as Resolution Professional |
10 |
| Fee payable as Liquidator |
10 |
| Dues of the banks with interest |
110 |
| Outstanding from Operational Creditors |
30 |
| Dues of Govts. |
15 |
| Workmen’s dues |
10 |
| Employee’s salary |
15 |
| Equity shareholders |
30 |
| Total |
230 |
(a) Mention the provisions relating to the constitution of the Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code, 2016. In the instant case, the IRP did not included the Operational Creditors. Whether this action of the IRP was justified? (Dec 2021, 10 marks)
(b) Comment on the following:
(i) How the voting of share shall be determined in the meeting of the CoC, since in the given case the finance was made available under the consortium arrangement?
(ii) What would have been the position of constitution of the CoC, if some of the operational creditor had assigned their rights in favour of the financial creditor? (Dec 2021, 7 + 3 = 10 marks)
(c) What is the meaning of ‘Resolution Plan’ and ‘Resolution Applicant’? List out the persons not eligible to be ‘Resolution Applicant’.
(Dec 2021, 2 + 2 + 6 = 10 marks)
(d) Explain relevant provisions for distribution of assets by the liquidator.
How the liquidator will pay-off the dues in priority order of various stakeholders in the given case? (Dec 2021, 5 + 5 = 10 marks)
Answer:
(a) Section 21 of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with the provisions relating to the committee of creditors (CoC):
1. The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.
2. The committee of creditors shall comprise all financial creditors of the corporate debtor:
Provided that a financial creditor or the authorized representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors:
Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.
3. Subject to sub-sections (6) and (6A), where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.
4. Where any person is a financial creditor as well as an operational creditor:
a. such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor, and shall be included in the committee of creditors, with voting share proportionate to the extent of financial debts owed to such creditor;
b. such person shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.
5. Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.
6. Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility provide for a single trustee or agent to act for all financial creditors, each financial creditor may
a. authorize the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share;
b. represent himself in the committee of creditors to the extent of his voting share;
c. appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or
d. exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.
(6A) Where a financial debt-
a. is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorized representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors;
b. is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act as their authorized representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors;
c. is represented by a guardian, executor or administrator, such person shall act as authorized representative on behalf of such financial creditors, and such authorized representative under clause (a) or clause (b) or clause (c) shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share.
(6B) The remuneration payable to the authorized representative-
i. under clauses (a) and (c) of sub-section (6A), if any, shall be as per the terms of the financial debt or the relevant documentation; and
ii. under clause (b) of sub-section (6A) shall be as specified which shall be form part of the insolvency resolution process costs.
7. The Board may specify the manner of voting and the determining of the voting share in respect of financial debts covered under sub-sections (6) and (6A).
8. Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent, of voting share of the financial creditors: Provided that where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be specified.
9. The committee of creditors shall have the 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.
10. The resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition.
As per section 21(2) of IBC the CoC shall comprise of financial creditors. The Operational Creditors do not have right to vote in the meeting of Committee of Creditors, however, the directors, partners and one representative of operational creditors may attend the meetings of Committee of Creditors.
(b) 1. Section 21(3) of the Insolvency and Bankruptcy Code, 2016 provides that subject to sub-sections (6) and (6A), where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.
Section 21(6) of the Insolvency and Bankruptcy Code, 2016 provides that where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility provide for a single trustee or agent to act for all financial creditors, each financial creditor may.
a. authorize the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share.
b. represent himself in the committee of creditors to the extent of his voting share.
c. appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or
d. exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.
Section 21 (6B) provides that the remuneration payable to the authorized representative:
- under clauses (a) and (c) of sub-section (6A), if any, shall be as per the terms of the financial debt or the relevant documentation; and
- under clause (b) of sub-section (6A) shall be as specified which shall be form part of the insolvency resolution process costs.
2. Section 21(5) of the Insolvency and Bankruptcy Code, 2016 provides that where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.
(c) In terms of Section 5(26) of the Insolvency and Bankruptcy Code, 2016 -“Resolution Plan” means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II.
Explanation – For removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.
Section 5(25) of the Insolvency and Bankruptcy Code, 2016 provides that “resolution applicant” means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h)of sub-section (2) of section 25 or pursuant to section 54K, as the case may be.
Persons not eligible to be resolution applicant – Section 29A:
A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person-
(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949);
(c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan:
Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.
(d) has been convicted for any offence punishable with imprisonment
- for two years or more under any Act specified under the Twelveth Schedule; or
- for seven years or more under any law for the time being in force:
Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment.
Provided further that this clause shall not apply in relation to a connected person.
(e) is disqualified to act as a director under the Companies Act, 2013: Provided that this clause shall not apply in relation to a connected person.
(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
(g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code:
Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;
(h) has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted underthis Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;
(i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
(j) has a connected person not eligible under clauses (a) to (i).
(d) Section 53 of the Insolvency and Bankruptcy Code, 2016 deals with distribution of assets in liquidation. The Insolvency and Bankruptcy Code, 2016 makes significant changes in the priority of claims for distribution of liquidation proceeds. In case of liquidation, the assets will be distributed in the following order in case of liquidation:
- the insolvency resolution process costs and the liquidation costs paid in full,
- workmen’s dues for the preceding 24 months and secured creditors, who have relinquished security,
- wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date,
- financial debts owed to unsecured creditors,
- government dues and remaining secured creditors (any remaining debt if they enforce their collateral),
- any remaining debt and dues,
- preference shareholders, and
- equity shareholders or partners, as the case may be.
In the given case the liquidator will distribute the assets in the following order of priority:
| Payment in order of priority |
Amount to paid in lakhs |
Fund available for distribution (₹ in Lakhs) |
|
|
150 |
| Fees of insolvency professional and Liquidator |
20 |
130 |
| Workmen’s dues for the preceding 24 months and secured creditors |
10 |
120 |
| Employee Salary |
15 |
105 |
| Unsecured Creditors (Operational creditors) |
30 |
75 |
| Government dues |
15 |
60 |
| Remaining secured creditors (any remaining debt if they enforce their collateral) |
60 |
0 |
Thus, in the instant case the liquidator shall consider the dues of the various stake holder in the priority as mentioned above. Accordingly, the banks will get only the residual amount which ₹ 60 lakh only.
Question 14.
Financial Creditor of M/s XYZ Ltd. (Corporate Debtor) filed an application for Corporate Insolvency Resolution Process (CIRP) before the Adjudicating Authority and Interim Resolution Professional (IRP) was appointed. The IRP for the purpose of formation of Committee of Creditors (CoC), verified the claims submitted by all the financial creditors and observed that all such financial creditors comes under the purview of related parties to the Corporate Debtor. Apart from the financial creditors there are 5 Operational Creditors only.
In the given situation, how the CoC will be formed ? Explain by qouting the relevant provisions contained in the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 6 marks)
Answer:
The provisions as contained in the Regulation 16 of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 are very much relevant in this regard. This Regulation provides as under:
1. Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation.
2. The committee formed under this ‘Regulation shall consist of following members:-
a. eighteen largest operational creditors by value:
Provided that if the number of operational creditors is less than eighteen, the committee shall include all such operational creditors;
b. one representative elected by all workmen other than those workmen included under sub-clause (a); and
c. one representative elected by all employees other than those employees included under sub-clause (a).
3. Every member of the committee formed underthis Regulation shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative, as the case may be, to the total debt.
Explanation – For the purposes of this sub-regulation, ‘total debt means the sum of-
a. the amount of debt due to the creditors listed in sub-regulation 2(a);
b. the amount of the aggregate debt due to workmen under sub regulation 2(b); and
c. the amount of the aggregate debt due to employees under sub regulation 2(c)
4. A committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors and its members, as the case may be. Now, according to the above Regulation 16 the answer to the given problem is as under:
Since all the Financial Creditors are related party to the Corporate Debtor, hence no Financial Creditor shall be a part of the CoC as per Regulation 16(1).
Further since there are Operational Creditors and their numbers are FIVE, hence all such Operational Creditors will be included in the CoC. As required by Regulation 16(2)(b) & (c) one representative shall also be included in the CoC.
Question 15.
(a) Read the case study carefully and answer the questions given at the end:
DK Swan Limited (DK) was subject to Corporate Insolvency Resolution Process (CIRP) initiated by an Operational Creditor under Section 9 of Insolvency Bankruptcy Code, 2016 (IBC). During the CIRP, claims were invited by the Interim Resolution Professional (IRP).
Sunrise filed its claim in Form C as a financial creditor for a sum of ₹ 62.60 lakh on 15th June, 2017. Thereafter, Sunrise filed a revised Form C for a sum of ₹ 119.11 lakh on 25th June, 2017. Sunrise had filed the revised claim Form on the basis of an alleged Memorandum of Understanding dated 17th September, 2010 executed with the Corporate Debtor, which stated that Inter Corporate Deposits (ICDs) of X 36.55 lakh have been granted to the Corporate Debtor by Sunrise bearing interest of 24% repayable in terms of the mutual agreement between the parties.
However, Sunrise has submitted that it has granted ICDs of ₹ 76.00 lakh (approx.) to the Corporate Debtor between July, 2008 and February, 2012. Out of this amount, Sunrise is claiming a principal amount of ₹ 33.00 lakh. The balance amount of ₹ 53.60 lakh was credited in the account of XYZ, which is a wholly owned subsidiary of Sunrise. The total claim of Sunrise has increased to ₹ 119.11 lakh in 7 years on account of interest at the rate of 24%.
XYZ filed its claim before the IRP in Form F as a creditor other than a financial creditor or operational creditor for a sum of ₹ 103.90 lakh on 15th June, 2017. Thereafter, XYZ filed a revised claim in Form C as a financial creditor for a sum of ₹ 119.72 lakh on 28th June, 2017. It had entered into a Development Agreement dated 6th April, 2011 with the Corporate Debtor for a sale consideration of ₹ 42.80 lakh to purchase development rights in a project. On 30th November, 2011, the Development Agreement was terminated and an Agreement to sell, along with a Side Letter, was executed between XYZ and the Corporate Debtor for purchase of flats. The sale consideration for the Agreement to sell was enhanced to ₹ 96.01 lakh from ₹ 42.80 lakh under the Development Agreement. XYZ paid a sum of ₹ 53.06 lakh as advance payment under the Agreement to Sell. This amount was adjusted out of the ICDs payable to Sunrise as noted above. The claim of XYZ is with respect to the principal amount of ₹ 53.06 lakh, which along with interest at the rate of 18% increased to ₹ 119.72 lakh in 5 years.
Phantom is also a financial creditor of the Corporate Debtor and is a part of Committee of Creditors (CoC). Its claim is based on a registered Deed of Assignment in its favour dated 2nd January, 2015, pursuant to which, Karnataka Bank Limited had assigned the non- performing assets relating to the credit facilities granted to the Corporate Debtor. The voting share of Phantom was reduced to 3.58% on account of XYZ and Sunrise being included in the CoC.
The CoC was constituted on 27th June, 2017. On 30th June, 2017, the IRP rejected the claim of Sunrise, inter alia, on the ground that the claim was not in the nature of a financial debt in terms of Section 5(8) of IBC since there was an absence of consideration for the time value of money, i.e., the period of repayment of the claimed ICDs was not stipulated.
The IRP also rejected the claim of XYZ on the ground that its claim as a financial creditor in Form C was filed after the expiry of the period for filing such a claim.
The IRP in his letter dated 30th June, 2017 has noted that as per the ledger provided by Sunrise, no interest was claimed on the alleged debt and no adjustment was made regarding the payment of principal or interest by the Corporate Debtor to Sunrise. It has been submitted in the written submissions filed on behalf of Sunrise and XYZ that the auditors of the Corporate Debtor had been putting a note in its balance sheets stating that the interest of 12% was not being paid to Sunrise due to a dispute.
Aggrieved by the rejection of their claim as financial creditors, XYZ and Sunrise filed applications before the National Company Law Tribunal (NCLT) to be included in the CoC. The NCLT by its order dated 5th July, 2017 allowed the applications. However, none of the other financial creditors, such as Phantom and YES Bank, were parties to these proceedings. The NCLT observed that XYZ’s original claim in Form F was filed on time and it has only amended its claim as one under Form C. The NCLT further observed that the amount given by Sunrise in the form of ICDs has been received as a deposit and is attracting interest as reflected in Form ‘26AS’, deducting TDS on interest. Thus, NCLT allowed Sunrise and XYZ to submit their claims as financial creditors with a direction to the IRP to consider the claims.
On 6th July, 2017, a meeting of the CoC took place which was attended by YES Bank and Phantom, and also by the newly approved financial creditors, XYZ and Sunrise. Following the meeting, YES Bank and Phantom filed applications in the NCLT for the exclusion of XYZ and Sunrise from the CoC on the ground that they are related parties.
The applications filed under Section 60(5) by Phantom also sought similar reliefs for:
(i) The removal of Sunrise and XYZ from the CoC; and
(ii) Directing the constitution of the CoC in terms of the Insolvency and Bankruptcy (Amendment) Ordinance 2018 (IBC Ordinance 2018).
As noted by NCLT, the Memorandum of Understanding dated 17th September, 2010, on the basis of which Sunrise had filed its claim in Form C before the IRP, was signed two years after the commencement of the purported transaction. The execution of the Memorandum of Understanding was sought to be explained on the basis that a formal document was created for specifying the rate of interest on the ICDs given by Sunrise to the Corporate Debtor. However, despite the creation of a formal document, the rate of interest being charged on the ICDs was 12% as mentioned in the claim before the IRP, which is half of the interest rate of 24% stipulated in the Memorandum of Understanding.
NCLT in its judgement dated 24th August, 2018 said :
(a) That Sunrise and XYZ did not qualify to be considered as financial creditors.
(b) In relation to the second issue, NCLT held that it “does not require a reply” in view of its above-mentioned finding. However, it took note of the first proviso to Section 21 (2) of the IBC, which was introduced with effect from 6th June, 2018. Under the first proviso, inter alia, a financial creditor who is a related party of the corporate debtor shall not have the right of representation, participation or voting in the CoC.
In appeal, the National Company Law Appellate Tribunal (NCLAT) proceeded of its decision to observe that admittedly Sunrise and XYZ are the financial creditors of the corporate debtor. Having stated so, the Appellate Tribunal proceeded to enquire into whether XYZ and Sunrise are related parties within the meaning of Section 5(24) of the IBC.
Answering the above issue in the affirmative, the NCLAT held that Sunrise and XYZ are related parties of the Corporate Debtor since :
(a) XYZ was a partner of the Corporate Debtor.
(b) During the transaction period of 2009 to 2012, Sunrise led by Kunal Kumar was making substantial financial arrangements on the basis of advice provided by the Corporate Debtor led by its Management and Directors.
(c) The Corporate Debtor was acting on the directions/instructions of Kunal Kumar who, along with his family, is the majority shareholder in Sunrise, of which XYZ is a wholly- owned subsidiary.
(d) On the basis of the same reasons, Kunal Kumar was also held to be a person participating in the policy-making process of the Corporate Debtor.
Aggrieved by order of NCLAT, Phantom approached the Hon’ble Supreme Court.
Referring the relevant case and relevant provisions of IBC, its Rules and Regulations made thereunder, answer the following questions :
(a) Explain whether Sunrise and XYZ are financial creditors of the Corporate Debtor ?
(b) Explain based on Supreme Court’s decision, if Sunrise and XYZ are related parties of the Corporate Debtor ?
(c) Whether Sunrise and XYZ have to be excluded from the CoC ?
(d) Section 21 (2) of the IBC provides that the Committee of Creditors (CoC)
shall comprise of all financial creditors of the corporate debtor. In light of this statutory provision what will be your answer, if there are no financial creditors or all the financial creditors are related party to the Corporate Debtor ? (June 2022, 10 marks each)
Question 16.
An Application for initiation of Corporate Insolvency Resolution Process (CIRP) was filed against a Corporate Debtor (CD) and the following four Banks submitted their claims as under:
| A Bank Limited |
₹ 14 crore |
| B Bank Limited |
₹ 3.26 crore |
| C Bank Limited |
₹ 18.27 crore, and |
| D Bank Limited |
₹ 8.99 crore |
It was the case of consortium finance.
The Corporate Debtor filed an appeal before National Company Law Appellate Tribunal (NCLAT) challenging the order of admission of CIRP, which was ultimately upheld by Supreme Court. NCLAT in another order, directed the Resolution Professional (RP) to keep the company as a going concern and the bankers were also directed to co-operate with the Resolution Professional in this regard.
The banks allowed continuous operations in the company’s account through which the company was also routing all the business cash in the normal course of its business.
In the course of these operations, the Corporate Debtor’s outstanding dues under the said accounts got gradually liquidated through its surplus cash flows accruing out of its increasing cash profits. As the Corporate Debtor was making good profit and had accumulated adequate cash balance, the erstwhile RP opted to reduce the utilization of the Fund-based facilities and thus squared off the Cash Credit (CC) facilities with all the banks. In the meantime, in one of the meeting of the Committee of Creditors (CoC), new RP was proposed, which was approved by the Adjudicating Authority.
The new RP asked the banks to reverse the amounts remitted by the previous RP while discharging his duties as per the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and its Regulations thereof. The lenders consortium contended that the operation in the accounts was allowed as per the directions of Tribunal and that the credit was received in the normal course of business. Meanwhile the Resolution Plan was also approved by Adjudicating Authority.
In light of the above facts, discuss, whether the contention of lenders consortium is correct ? (June 2022, 6 marks)
Question 17.
Solver Ltd., the Operational Creditor (OC), supplied Jute bags to Atren Ltd., the Corporate Debtor (CD) through 12 invoices for ₹ 78.63 lakh during a period of May 2015 to November 2016.
The OC claimed its amount from the date of acknowledgement i.e. 12th December, 2017 with interest. The CD .sent a Legal Notice (Notice of Dispute) on 20th September, 2018 after that it was assured that the outstanding amount will be paid within a month, but no outstanding debt was paid. It also mentioned that past payments and return of material were not factored in raising the demand.
The OC raised demand notice under Section 8 of the IBC again on 12th October, 2018 which was delivered on 27th October, 2018. The CD sent a reply on 31st October, 2018 to the aforesaid demand notice wherein it mentioned that the material worth 110.65 lakh were returned on 23rd June, 2017, owing to the quality issue and the same were duly received and acknowledged by the Operational Creditor, so dispute was raised.
The National Company Law Tribunal (NCLT) rejected the application of OC. The OC referred the matter before the National Company Law Appellate Tribunal (NCLAT). Referring the relevant case, explain whether the OC will succeed before NCLAT ? (June 2022, 6 marks)
Question 18.
A Bank extended credit facility to M/s. Jaiveer Construction (JC), a proprietary firm of the appellant. The loan amount was disbursed to JC, the Principal Borrower. Gupta Foods Ltd. (GFL), of which the appellant is also a Promoter/Director, had offered guarantee to the loan accounts of JC, the Principal Borrower. The loan accounts of JC were declared NPA on 30th January, 2011.
During the pendency of the stated action initiated by the Financial Creditor (FC), JC the Principal Borrower had repeatedly assured to pay the outstanding amount, but the commitment remained unfulfilled.
The FC eventually wrote to GFL in December, 2018 in the form of a purported notice of payment. The GFL replied to the said notice of demand vide letter dated 8th January, 2019, inter alia, clarifying that it was not the Principal Borrower, nor owed any financial debt to the financial creditor and had not committed any default in repayment of the stated outstanding amount.
The FC then proceeded to file an application on 23rd March, 2019 under Section 7 of the Code for initiating Corporate Insolvency Resolution Proceeding (CIRP) against the GFL, before the National Company Law Tribunal (NCLT). This application came to be resisted on diverse counts and in particular, on the preliminary ground that it was not maintainable because the Principal Borrower was not a “Corporate Person”; and further, it was barred by limitation, as the date of default was 30th January, 2011, whereas, the application had been filed on 23rd March, 2019 i.e., beyond the period of three years.
Examine in light of decided case, whether two objections made by GFL were sustainable or not ? (June 2022, 6 marks)
Question 19.
A Ltd. and the B Ltd. had jointly submitted the Resolution Plan for taking over the Company. The same was approved unanimously by the Committee of Creditors (CoC), and after that, the Resolution Plan was further approved by the Adjudicating Authority (AA).
The approved Resolution Plan got executed, and the shares were allotted as per the terms of the approved Plan. All money in respect of 34% shares were paid by the A Ltd. and B Ltd. got 51% paid-up equity shares. Later, after 13 months of completion of Corporate Insolvency Resolution Plan (CIRP), the AA, on an application of B Ltd. made changes in Plan, thus increasing its shareholding to 75% and reducing the shareholding of A Ltd. to 10%. This was done as typographical/ clerical error brought to notice of AA.
Discuss, based on case laws, whether A Ltd. will succeed in Appeal ? (June 2022, 6 marks)
Question 20.
Discuss the provisions of Part II of the Insolvency and Bankruptcy Code, 2016.
Answer:
- Part II of the Code deals with the insolvency resolution and liquidation for corporate persons.
- Section 4 of the Insolvency and Bankruptcy Code, 2016 provides that Part II of the Code shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees.
- The proviso to section 4 empowers the Central Government to specify, by notification, the minimum amount of default of higher value but it shall not be more than one crore rupees.
- Part II of the Insolvency and Bankruptcy Code, 2016 lays down the following two independent stages:
- Corporate Insolvency Resolution Process [Sections 4 and 6 to 32] and
- Liquidation [Sections 33 to 54 and Section 59] Chapter II of Part II deals with corporate insolvency resolution process while Chapter III together with Chapter V of Part II govern the liquidation process for corporate persons.
- According to Rule 3(b), “corporate insolvency resolution process” means the insolvency resolution process for corporate persons under Chapter II of Part II of the Code.
- In corporate insolvency resolution process, the financial creditors assess the viability of debtor’s business and the options for its revival and rehabilitation.
- If the corporate insolvency resolution process fails or the financial creditors decide that the business of the debtor cannot be carried on in a profitable manner and it should be wound up, the debtor’s business undergoes the liquidation process.
- In the liquidation process, the assets of the debtor are realised and distributed by the liquidator in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.
- Chapter II of Part II specifically deals with corporate insolvency resolution process. The Insolvency and Bankruptcy Code, 2016 also contains a provision for Fast Track Corporate Insolvency Resolution Process in Chapter IV of Part II of the Code and is applicable to small corporates as defined in Section 55(2)’of the Insolvency and Bankruptcy Code, 2016.
Question 21.
Who may Initiate Corporate Insolvency Resolution Process in case of default?
Answer:
Section 6 of the Code provides that in case of a default, the following people are entitled to initiate a corporate insolvency resolution process:
- a financial creditor,
- an operational creditor or
- the corporate debtor itself.
Question 22.
Explain the term default as per Section 3(12) of the code.
Answer:
The term “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be [Section 3(12)].
Question 23.
Define “financial creditor” and “operational creditor” as per the code.
Answer:
According to Section 5(7), a “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
According to section 5(20) an “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
Question 24.
Define “financial debt” as per the code.
Answer: .
According to section 5(8) of the Code, a “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. It includes –
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause.
Question 25.
State the process of initiation of Corporate Insolvency Resolution by financial creditor.
Answer:
Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the initiation of the corporate insolvency resolution process by a financial creditor or two or more financial creditors jointly.
1. A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
2. The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.
3. The financial creditor shall, along with the application furnish
(a) any of the following record or evidence of default, namely:
(i) certified copy of entries in the relevant account in the bankers’ book as defined in clause (3) of section 2 of the Bankers’ Books Evidence Act, 1891;
(ii) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, where the period of appeal against such order has expired.”
(b) the name of the resolution professional proposed to act as an interim resolution professional; and
(c) any other information as may be specified by the Board.
4. The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).
5. Where the Adjudicating Authority is satisfied that – (a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or (b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application.
6. The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).
7. The Adjudicating Authority shall communicate the order under clause (a) and (b) of sub-section (5) to the financial creditor and the corporate debtor, within seven days of admission or rejection of such application, as the case may be.
Question 26.
What has to be submitted at the time of initiating corporate insolvency resolution process?
Answer:
The financial creditor shall, along with the application furnish –
(a) any of the following record or evidence of default, namely:-
(i) certified copy of entries in the relevant account in the bankers’ book as defined in clause (3) of section 2 of the Bankers’ Books Evidence Act, 1891;
(ii) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, where the period of appeal against such order has expired.”
(b) the name of the resolution professional proposed to act as an interim resolution professional; and
(c) any other information as may be specified by the Board.
Question 27.
What is the time frame for ascertaining the existence of default?
Answer:
After the filing of the application, the National Company Law Tribunal shall ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor within fourteen days of the receipt of the application [Section 7(4)].
Question 28.
State the process of admission of an application.
Answer:
Once NCLT is satisfied of existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed resolution professional, it shall admit the application [Section 7(5)]. The National Company Law Tribunal is not required to look into any other criteria for admission of the application.
Section 7 (6) provides that the insolvency resolution process commences from the date of admission of the application.
Question 29.
State the grounds on which the application can be rejected?
Answer:
If the National Company Law Tribunal finds that the default has not occurred or the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may reject the application under section 7(5)(b). Before rejecting the application under section 7(5)(b), the National Company Law Tribunal shall give a notice to the applicant to rectify the defect in the application within seven days of receipt of such notice from the National Company Law Tribunal.
Admission or rejection, the same shall be communicated within seven days
(a) to the financial creditor and the corporate debtor where the application is accepted, (b) to the financial creditor where the application is rejected.
Question 30.
Explain Insolvency Resolution by Operational Creditor.
Answer:
Section 8 the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the initiation of the corporate insolvency resolution process by an operational creditor. The procedure for insolvency resolution by operational creditor laid down in section 8 differs from the procedure applicable to financial creditors under section 7 of the Code.
Section 8 of the Code states that:
1. An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount’ involved in the default to the corporate debtor in such form and manner as may be prescribed.
2. The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor –
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt-
(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.
Question 31.
State the process of application for Initiation of Corporate Insolvency Resolution Process by Operational Creditor.
Answer:
As per Section 9 of the Code states:
1. After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if no payment is received by the operational creditor from the corporate debtor, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
2. The application shall be filed in the form 5 and manner with prescribed fees. A copy of the application to the registered office of the corporate debtor and to the Board, by registered post or speed post or by hand or by electronic means, before filing with the Adjudicating Authority.
3. The operational creditor shall, along with the application furnish:
(a) a copy of the invoice demanding payment or demand notice;
(b) an affidavit that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions that no payment of an unpaid operational debt is made by the corporate debtor;
(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor,
(e) any other proof confirming non-payment of any unpaid operational debt.
4. An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
5. The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order –
(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if,
(a) the application made under sub-section (2) is complete;
(b) there is no payment of the unpaid operational debt;
(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;
(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.
(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if –
(a) the application made under sub-section (2) is incomplete;
(b) there has been payment of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;
(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending against any proposed resolution professional.
6. The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section.
Question 32.
How can an operational creditor apply?
Answer:
1. An operational creditor, shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under section 9 of the Code in Form 5, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
2. The applicant under sub-rule (1) shall serve a copy of the application to the registered office of the corporate debtor and to the Board, by registered post or speed post or by hand or by electronic means, before filing with the Adjudicating Authority.
Section 9(3) of the Code lays down that such application by the operational creditor shall be accompanied with:
(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available;
(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
(e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed. Section 9(3) of the Code was amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
Question 33.
When will the application of the operational creditor be accepted by NCLT?
Answer:
The National Company Law Tribunal shall admit the application and communicate such decision to the operational creditor and the corporate debtor within fourteen days of the receipt of such application if the following conditions are fulfilled-
(a) the application made under sub-section (2) is complete,
(b) there is no payment of the unpaid operational debt,
(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor,
(d) notice of dispute has not been received by the operational creditor or there is no record of dispute in the information utility, and
(e) there is no disciplinary proceeding pending against the proposed resolution professional.
Question 34.
On what grounds the application maybe rejected by NCLT?
Answer:
The National Company Law Tribunal shall reject the application and communicate such decision to the operational creditor and the corporate debtor within fourteen days of the receipt of such application if-
(a) the application is incomplete,
(b) there has been payment of the unpaid operational debt, (c) the creditor has not delivered the invoice or notice for payment to the corporate debtor,
(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility, or
(e) any disciplinary proceeding is pending against any proposed resolution professional.
Question 35.
Discuss the process of declaration of moratorium and public announcement.
Answer:
Section 13 of the Code states that NCLT may by an order-
(a) declare a moratorium for the purposes as per section 14,
(b) cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15, and
(c) appoint an interim resolution professional in the manner as laid down in section 16.
According to Section 13(2), the public announcement referred to in Section 13(1 )(b) shall be made immediately after the appointment of the interim resolution professional.
Question 36.
State the time-limit for completion of Insolvency Resolution Process.
Answer:
Section 12 of the Code which prescribes a time limit for completion of insolvency resolution process reads as follows:
(1) The process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.
(2) In order to extend the period beyond 182 days, a resolution shall be passed at a meeting of the committee of creditors by a vote of sixty-six per cent of the voting shares.
(3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied, it may extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days.
Question 37.
Who are not entitled to make application to initiate corporate insolvency process?
Answer:
Section 11 of the Code lists out the persons not eligible to make an application to initiate the corporate insolvency resolution process. It includes
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any term of resolution plan approved twelve months before the application date; or
(d) a corporate debtor in respect of whom a liquidation order has been made.
Question 38.
Mention the purpose of declaration of moratorium.
Answer:
- Ensures that multiple proceedings are not taking place simultaneously and thus avoids the possibility of potentially conflicting outcomes of related proceedings.
- Keeps the corporate debtor’s assets together during the insolvency resolution process and facilitates orderly completion of the process,
- Ensures that the company may continue as a going concern while the creditors assess the options for resolution of default.
- Prohibition on disposal of the corporate debtor’s assets ensure that the corporate debtor/management does not transfer its assets, thereby stripping the corporate debtor of value during the corporate insolvency resolution process.
Question 39.
Discuss the provisions of public announcement of Corporate Insolvency Resolution Process.
Answer:
Section 15 provides that the public announcement of the corporate
insolvency resolution process shall contain the following information:
(a) Name and address of the corporate debtor under the corporate insolvency resolution process,
(b) Name of the authority with which the corporate debtor is incorporated or registered,
(c) Last date for submission of claims, as may be specified,
(d) Details of the interim resolution professional who shall be vested with the management of the corporate debtor and be responsible for receiving claims,
(e) Penalties for false or misleading claims, and
(f) Date on which the corporate insolvency resolution process shall close, which shall be the one hundred and eightieth day from the date of the admission of the application under sections 7, 9 or section 10, as the case may be.
Question 40.
Write a short note on the management of affairs of Corporate Debtor by Interim Resolution Professional.
Answer:
Section 17(1) of the Code provides that from the date of appointment of the
Interim Resolution Professional (IRP)-
(a) he shall manage the affairs of the corporate debtor,
(b) all the powers of the board of directors or the partners of the corporate debtor, shall stand suspended and be exercised by the IRP,
(c) he shall have access to all required documents and records and the officers and managers of the corporate debtor shall report to the IRP.
(d) the financial institutions maintaining accounts of the corporate debtor
shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.
Question 41.
Discuss the provisions of appointment and term of the Interim Resolution Professional.
Answer:
The Adjudicating Authority shall appoint an interim resolution professional within fourteen days from the insolvency commencement date.
Where the application for corporate insolvency resolution process is made by an operational creditor and
(a) no proposal for an interim resolution professional is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional;
(b) a proposal for an interim resolution professional is made under sub-section (4) of section 9, the resolution professional as proposed, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.
The Board shall, within ten days of the receipt of a reference from the Adjudicating Authority under sub- section (3), recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.
The term of the interim resolution professional shall continue till the date of appointment of the resolution professional under section 22.
Question 42.
What are the duties of Interim Resolution Professional.
Answer:
The interim resolution professional shall perform the following duties:
(a) to collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to:
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors to him pursuant to the public announcement made;
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;
(e) file the information collected with the information utility; and
(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including:
(i) assets over which the corporate debtor has ownership rights which may be located in a foreign country;
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or authority;
(g) to perform such other duties as may be specified by the Board.
Question 43.
Discuss the process of appointment of Resolution Professional.
Answer:
- As per Section 22 at the first meeting of the committee of creditors held within seven days of its constitution, at least 66 per cent of the committee of creditors may either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.
- Where the committee of creditors resolves to continue the interim resolution professional as resolution professional, the decision shall be communicated to the interim resolution professional, the corporate debtor and the Adjudicating Authority.
- In case, if the committee of creditors resolves to replace the interim resolution professional, it shall file an application before the Adjudicating Authority for the appointment of the proposed resolution professional along with a written consent from the proposed resolution professional in the specified form.
- The Adjudicating Authority shall forward the name of the resolution professional proposed under clause (b) of sub-section (3) to the Board for its confirmation and shall make such appointment after confirmation by the Board.
- If the Board does not confirm the name of the proposed resolution professional within ten days of the receipt of the name of the proposed resolution professional, the Adjudicating Authority shall, by order, direct the interim resolution professional to continue to function as the resolution professional until such time as the Board confirms the appointment of the proposed resolution professional.
Question 43.
Mention the eligibility criteria for resolution professional.
Answer:
Regulation 3 of the Code lays down the following eligibility criteria for a resolution professional:
(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.
(2) A person shall be considered independent of the corporate debtor, if he:
(a) is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013 (18 of 2013), where the corporate debtor is a company;
(b) is not a related party of the corporate debtor; or
(c) is not an employee or proprietor or a partner of a firm of auditors or secretarial auditors in practice or cost auditors of the corporate debtor or of a legal or a consulting firm, having any transaction with the corporate debtor amounting to five per cent or more of the gross turnover of such firm, in the last three financial years.
(3) Where the committee decides to appoint/ replace the interim resolution professional under section 22 or 27 as the case maybe, it shall obtain the written consent of the proposed resolution professional in Form AA of the Schedule.
(4) A resolution professional shall make disclosures at the time of his appointment and thereafter in accordance with the Code of Conduct.
(5) A resolution professional, who is a director or a partner of an insolvency professional entity, shall not continue as a resolution professional in a corporate insolvency resolution process if the insolvency professional entity or any other partner or director of such insolvency professional entity represents any of the other stakeholders in the same corporate insolvency resolution process.
Question 44.
Define Interim Finance.
Answer:
- Interim finance includes any financial debt raised by the resolution professional during the insolvency resolution process period [Section 5(15)].
- Amount of any interim finance and the costs incurred in raising such finance is included in the “insolvency resolution process costs” [Section 5(13)].
- In case the corporate debtor goes into liquidation, the insolvency resolution process costs which includes interim finance and the costs incurred in raising such finance are paid from the sale of the liquidation assets in priority during the distribution of assets [Section 53]
Question 45.
Describe the authority of Interim Resolution Professional.
Answer:
For the protection and preservation of the value of the property of the corporate debtor and managing his operations, the Interim Resolution Professional shall have the following authority:
(a) to appoint accountants, legal or other professionals,
(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process,
(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property,
(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern, and
(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.
Question 46.
Discuss the authority of Resolution Professional to conduct corporate insolvency resolution process.
Answer:
Section 23 provides that the resolution professional shall be responsible for carrying out the entire corporate insolvency resolution process and managing the operations of the corporate debtor during such process. Section 23 of the Code states-
1. Subject to section 27, the resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period: Provided that the resolution professional shall, if the resolution plan under sub-section (6) of section 30 has been submitted, continue to manage the operations of the corporate debtor after the expiry of the corporate insolvency resolution process period until an order is passed by the Adjudicating Authority under section 31.
2. The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter.
3. In case of any appointment of a resolution professional under sub-sections (4) of section 22, the interim resolution professional shall provide all the information, documents and records pertaining to the corporate debtor in his possession and knowledge to the resolution professional.
Question 47.
Discuss the duties of Resolution Professional.
Answer:
Section 25 sets out the duty of resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor and lays down the functions he may perform for the same. The resolution professional shall undertake the following actions:
(a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;
(b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings,
(c) raise interim finances subject to the approval of the committee of creditors under section 28,
(d) appoint accountants, legal or other professionals in the manner as specified by Board,
(e) maintain an updated list of claims,
(f) convene and attend all meetings of the committee of creditors,
(g) prepare the information memorandum in accordance with section 29,
(h) invite prospective resolution applicants, who fulfil such criteria as may be laid down by him with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit a resolution plan or plans.
(i) present all resolution plans at the meetings of the committee of creditors,
file application for avoidance of transactions in accordance with Chapter III, if any, and ‘
(j) such other actions as may be specified by the Board.
Question 48.
Write a note on committee creditors.
Answer:
Section 21 and 24 of the Insolvency and Bankruptcy Code, 2016 make provisions relating to the committee of creditors.
Section 21 deals with the constitution of committee of creditors while section 24 prescribes the modalities for the meeting of the committee of creditors. Section 28 of the Code lists out certain actions that may be taken by the resolution professional only with the prior approval of the committee of creditors by a vote of 66 per cent of the voting shares.
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 has added a new section 25A to provide for rights and duties of authorised representative of financial creditors.
1. The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.
2. The committee of creditors shall comprise all financial creditors of the corporate debtor: Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors.
3. Where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.
4. Where any person is a financial creditor as well as an operational creditor,
(a) such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor, and shall be included in the committee of creditors, with voting-share proportionate to the extent of financial debts owed to such creditor;
(b) such person shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.
5. Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.
6. Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility provide for a single trustee or agent to act for all financial creditors, each financial creditor may
(a) authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share;
(b) represent himself in the committee of creditors to the extent of his voting share;
(c) appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or
(d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.
6A. A financial debt –
(a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors;
(b) is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors;
(c) is represented by a guardian, executor or administrator, such person shall act as authorised representative on behalf of such financial creditors, and such authorised representative under clause (a) or clause (b) or clause (c) shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share.
6B. Remuneration to the authorised representative, shall be as per the terms of the financial debt or the relevant documentation and shall be part of the insolvency resolution process costs.
7. The Board may specify the manner of voting and the determining of the voting share in respect of financial debts covered under sub-sections (6) and (6A).
8. Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent, of voting share of the financial creditors.
9. The committee of creditors shall have the 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.
10. The resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition.
Question 49.
Mention the modalities for the meeting of Committee of Creditors.
Answer:
Section 24 of the Code prescribes the following modalities for the meeting of the committee of creditors.
1. The members of the committee of creditors may meet in person or by such other electronic means as may be specified. [Section 24(1)].
2. All meetings of the committee of creditors shall be conducted by the resolution professional. [Section 24(2)].
3. The resolution professional shall give notice of each meeting of the committee of creditors to:
(a) members of committee of creditors, including the authorised representatives referred to in subsections (6) and (6A) of section 21 and sub-section (5),
(b) members of the suspended Board of Directors or the partners of the corporate persons, as the case may be,
(c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten percent of the debt [Section 24(3)]
4. The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings. The absence of any such director, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting. [Section 24(4)].
5. Subject to sub-sections (6), (6A) and (6B) of section 21, any creditor who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor in a meeting of the committee of creditors: Provided that the fees payable to such insolvency professional representing any individual creditor will be borne by such creditor. [Section 24(5)].
6. Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor. [Section 24(6)].
7. The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board. [Section 24(7)].
8. The meetings of the committee of creditors shall be conducted in such manner as may be specified. [Section 24(8)]
Question 50.
What are the rights and duties of Authorised Representative of Financial Creditors?
Answer:
The Insolvency and Bankruptcy Code has added a new section 25A to
provide for rights and duties of authorised representative of financial
creditors.
1. The authorised representative shall have the right to participate and vote in meetings of the committee of creditors on behalf of the financial creditor subject to prior voting instructions [Section 25A(1)].
2. It shall be the duty of the authorised representative to circulate the agenda and minutes of the meeting of the committee of creditors to the financial creditor he represents [Section 25A (2)].
3. The authorised representative shall not act against the interest of the financial creditor he represents and shall always act in accordance with their prior instructions [Section 25A (3)].
4. The authorised representative shall file with the committee of creditors any instructions received by way of physical or electronic means, from the financial creditor he represents, for voting in accordance therewith, to ensure that the appropriate voting instructions of the financial creditor he represents is correctly recorded by the interim resolution professional or resolution professional, as the case may be. [Section 25A(4)].
Question 51.
Discuss the provisions for replacement of Resolution Professional by Committee of Creditors?
Answer:
Section 27 provides that a resolution professional may be replaced at any time during the corporate insolvency resolution process by the committee of creditors by a sixty-six percent majority of voting shares.
1. Where, at any time during the corporate insolvency resolution process, the committee or creditors is of the opinion that a resolution professional appointed under section 22 is required to be replaced, it may replace him with another resolution professional in the manner provided under this section.
2. The committee of creditors may, at a meeting, by a vote of sixty-six per cent of voting shares, resolve to replace the resolution professional appointed under section 22 with another resolution professional, subject to a written consent from the proposed resolution professional in the specified form.
3. The committee of creditors shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority.
4. The Adjudicating Authority shall forward the name of the proposed resolution professional to the Board for its confirmation and a resolution professional shall be appointed in the same manner as laid down in section 16.
5. Where any disciplinary proceedings are pending against the proposed resolution professional under sub-section (3), the resolution professional appointed under section 22 shall continue till the appointment of another resolution professional under this section.
Question 52.
Discuss the function of preparation of information memorandum.
Answer:
- Section 29 of the Code lays down the preparation of an information memorandum as one of the main functions of the resolution professional.
- An information memorandum is envisaged to be prepared in order for the resolution applicants (market participants) to provide solutions for resolving the insolvency of the corporate debtor.
- It provides that the resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.
- It further provides that the resolution professional shall provide to the resolution applicant access to all relevant information in physical and electronic form, provided such resolution applicant undertakes:
(a) to comply with provisions of law for the time being in force relating to confidentiality and insider trading,
(b) to protect any intellectual property of the corporate debtor it may have access to, and
(c) not to share relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with.
Question 53.
State the provisions under Section 28 of the Code.
Answer:
Section 28 of the Code lists out certain actions that may be taken by the resolution professional only with the prior approval of the committee of creditors by a vote of 66 per cent of the voting shares.
The aim of this section is to secure consent of the committee of creditors for certain specific matters as without prior consent of creditors committee such actions shall be void. The resolution professional may also be liable to be replaced. Such actions are:
(a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;
(b) create any security interest over the assets of the corporate debtor;
(c) change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company;
(d) record any change in the ownership interest of the corporate debtor;
(e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;
(f) undertake any related party transaction;
(g) amend any constitutional documents of the corporate debtor;
(h) delegate its authority to any other person;
(i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties;
(j) make any change in the management of the corporate debtor or its subsidiary;
(k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business.
Question 54.
Explain the process of filing an application by financial creditor?
Answer:
- A financial creditor, either by itself or jointly, shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under section 7 of the Code in Form 1, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
- Where the applicant under sub-rule (1) is an assignee or transferee of a financial contract, the application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documentation to demonstrate the assignment or transfer.
- The applicant shall serve a copy of the application to the registered office of the corporate debtor and to the Board, by registered post or speed post or by hand or by electronic means, before filing with the Adjudicating Authority.
- In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf.
