Corporate Insolvency Resolution Process, Liquidation & Winding-up: An Overview – Setting Up of Business Entities and Closure Important Questions

Corporate Insolvency Resolution Process, Liquidation & Winding-up: An Overview – Setting Up of Business Entities and Closure Important Questions

Question 1.
Distinguish between: Insolvency & Bankruptcy.
Answer:
Following are the main points of difference between insolvency and bankruptcy:

Points Insolvency Bankruptcy
Meaning When an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due it is called insolvency. Bankruptcy occurs when Tribunal has determined insolvency, and given legal orders for it to be resolved.
Situation Insolvency describes a situation where the debtor is unable to meet his obligations. Bankruptcy is a legal scheme in which an insolvent debtor seeks relief.
Solvency If Insolvency is resolved it leads to Solvency State which is positive If Insolvency is not resolved it leads to bankruptcy in the case of individual and liquidation in the case of corporates
State or Conclusion Insolvency is a state Bankruptcy is conclusion

Question 2.
Write a short note on Insolvency Professional
Answer:
Insolvency Professional [Section 3(19)]: Insolvency professional means a person enrolled u/s 206 with an insolvency professional agency as its member and registered with the Insolvency & Bankruptcy Board of India (IBBI) as an insolvency professional u/s 207.

Work of Insolvency & Bankruptcy: The Insolvency & Bankruptcy Code, 2016 envisages a very big role for insolvency professionals. It is envisaged that most of the work relating to insolvency and bankruptcy will be handled by insolvency professionals.

Person: Since the word used is ‘person’, thus insolvency professional can I be only an individual, LLP, partnership firm, or a company.

Code of Conduct: The insolvency professional should follow the code of conduct as specified in Section 208(2) and in First Schedule to the IBBI (Insolvency Professional) Regulation, 2016.

Disciplinary Action: Disciplinary action against insolvency professional agency and insolvency professional can be initiated by the IBBI as per I provisions of sections 217 to 220 of the Code.

Question 3.
To which Corporate Debtors provisions relating to insolvency resolution and liquidation as contained in PART II of the Insolvency & Bankruptcy Code, 2016 applies.
Answer:
PART II (Sections 4 to 77) of the Insolvency & Bankruptcy Code, 2016 deals with insolvency resolution and liquidation for corporate persons. Application [Section 4]: Part II shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount I of the default is Rs 100 lakh.

Question 4.
Who may initiate the corporate insolvency resolution process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Persons who may initiate corporate insolvency resolution process [Section 6]: Where any corporate debtor commits a default, they may initiate corporate insolvency resolution process in respect of such corporate debtor.

  • Financial Creditor
  • Operational Creditor
  • Corporate Debtor itself

Question 5.
Who shall not be entitled to make an application to initiate the corporate insolvency resolution process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Persons not entitled to make application [Section 11]: Following persons shall not be entitled to make an application to initiate corporate insolvency resolution process, namely:

  1. A corporate debtor undergoing a corporate insolvency resolution process.
  2. A corporate debtor having completed the corporate insolvency resolution process 12 months preceding the date of making of the application.
  3. A corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application.
  4. A corporate debtor in respect of whom a liquidation order has been made.

Question 6.
What is the time limit for completion of the corporate insolvency process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Time-limit for completion of insolvency resolution process [Section 12]:
1. The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such a process.

2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond 180 days if instructed to do so by a resolution passed | at a meeting of the committee of creditors by a vote of 6696 of the voting shares.

3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that the 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 90 days.

However, any extension of the period of the corporate insolvency resolution process under this section shall not be granted more than once.

Question 7.
Referring to the provisions of the Insolvency & Bankruptcy Code, 2016, answer the following:
1. Who appoints the interim resolution professional in a corporate insolvency resolution process?
Answer:
Appointment and tenure of the interim resolution professional [Section 16]:
The Adjudicating Authority shall appoint an interim resolution professional within 14 days from the insolvency commencement date.

2. What is the time limit for such an appointment?
Answer:
Where the application for corporate insolvency resolution process is made by a financial creditor or the corporate debtor, the resolution professional, as proposed respectively, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.

3. What are the conditions in relation to such an appointment?
Answer:
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 u/s 9(4), the resolution professional as proposed, shall be appointed as the interim resolution professional if no disciplinary proceedings are pending against him.

4. For what term interim resolution professional is appointed?
Answer:
The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, 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 resolution professional u/s 22.

Question 8.
XYZ Ltd. was incorporated in the year 2015 in the State of Maharashtra. The Company was incorporated by a joint venture between QPR Ltd. & RSP Ltd. to manufacture five thousand electric cars in India. On completion of the venture the company intends to initiate a voluntary liquidation process under the Insolvency & Bankruptcy Code, 2016. The company has some debts but no such debt comes under the ‘default debt’ category. As a practicing professional in insolvency work, you are required to state the procedure to be followed such voluntary liquidation under the Insolvency & Bankruptcy Code, 2016.
Answer:
A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation.

Below is the brief procedure of voluntary liquidation of a corporate person under the Insolvency & Bankruptcy Code, 2016:

Step 1: Submission of declaration to ROC, stating that the company is able to pay its dues and is not being liquidated to default in debt.

Step 2: Pass special resolution for approving the proposal of voluntary liquidation and appointment of a liquidator, within 4 weeks of the aforesaid declaration. If a corporate person owes debts, approval of creditors having a 2/3rd majority would also be required.

Step 3: Public announcement inviting claims of all stakeholders, within 5 days of such approval, in the newspaper as well as on the website of the corporate person.

Step 4: Intimation to the ROC and the Board about the Approval, within 7 days of such Approval.

Step 5: Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action, etc., and submission of the same to a corporate person within 45 days of such Approval.

Step 6: Verification of claims, within 30 days from the last date for receipt of claims and preparation of a list of stakeholders, within 45 days from the last date for receipt of claims.

Step 7: Opening of a bank account in the name of the corporate person followed by the words ‘involuntary liquidation’, in a scheduled bank, for the receipt of all money due to the corporate person.

Step 8: Sale of assets, recovery of monies due to corporate person, the realization of uncalled capital or unpaid capital contribution.

Step 9: Distribution of the proceeds from realization within 6 months from the receipt of the amount to the stakeholders.

Step 10: Submission of the final report by the liquidator to the corporate person, ROC, and the Board and application to the National Company Law

Step 11: Submission of NCLT order regarding the dissolution, to the concerned ROC within 14 days of the receipt of order.

Question 9.
RKG Infrastructure Ltd. was incurring continuous losses and its financial position went from bad to worse. Now’, the Company is undergoing a corporate resolution process. Dinesh who is one of the senior employees of the company has not been paid his salary for 3 months amounting to ₹ 4,50,000. He files an application for initiating the corporate insolvency resolution process with an Adjudicating Authority. Analyze and state whether Dinesh is entitled to make an application to initiate the corporate insolvency resolution process. [Dec. 2018 (5 Marks)]
Answer:
Facts of Case: RKG Infrastructure Ltd. was incurring continuous losses and its financial position went from bad to worse. Now, the Company is undergoing a corporate resolution process. Dinesh who is one of the senior employees of the company has not been paid his salary for 3 months amounting to ₹ 4,50,000. He files an application for initiating corporate insolvency resolution process with an Adjudicating Authority Provision: As per Section 4 of the Insolvency & Bankruptcy Code, 2016, if the corporate debt is more than RslOO lakh corporate insolvency resolution and liquidation process can be initiated.

As per Section 6, where any corporate debtor commits a default, a Financial Creditor, an Operational Creditor, or the Corporate Debtor itself may initiate the corporate insolvency resolution process in respect of such a corporate debtor.

As per section 5(20), an operational creditor includes a person to whom an operational debt is owed. As per section 5(21), operational debt includes means of a claim in respect of employment.

Conclusion: Thus, an employee of the company to whom a salary of more than Rs 100 lakh is due can initiate corporate insolvency process being an operational creditor of the company under the Insolvency & Bankruptcy Code, 2016 and therefore senior employee whose salary of Rs 4,50,000 is pending cannot alone file application of Corporate Insolvency Resolution Process.

Question 10.
Time-limit an extension of the period in Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016. Comment. [June 2019 (3 Marks)]
Answer:
Time-limit for completion of insolvency resolution process [Section 12]:
1. The corporate 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 such a process.

2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process 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 66% of the voting shares.

3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that the 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.

However, any extension of the period of the corporate insolvency resolution process under this section shall not be granted more than once.

4. It 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 CIRP granted under section 12 and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

Question 11.
Elaborate ‘Waterfall Arrangement’ under the Insolvency and Bankruptcy Code, 2016. [June 2019 (5 Marks)]
Answer:
Waterfall arrangement or waterfall payment scheme describes the order in which creditors are paid. In a debt context, it is used to describe the sonority of debt liabilities.

Section 53 of the Insolvency & Bankruptcy Code, 2016 provides for the manner of distribution of assets in case of liquidation and order of priority of distribution. This order of priority is also known as the “waterfall arrangement” since each category of persons comes in priority after the previous one.

Distribution of assets [Section 53]: Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:
1. The insolvency resolution process costs and the liquidation costs paid in full.

2. The following debts which shall rank equally between and among the following:
(a) Workmen’s dues for the period of 24 months preceding the liquidation commencement date, and
(b) Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52.

3. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.

3. Financial debts owed to unsecured creditors.

5. The following dues shall rank equally between and among the following:
(a) any amount due to .the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(b) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

6. Any remaining debts and dues.

7. Preference shareholders, if any; and

8. Equity shareholders or partners, as the case may be.
Any contractual arrangements between recipients with equal ranking, if disrupting the order of priority shall be disregarded by the liquidator.

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients and the proceeds to the relevant recipient shall be distributed after such deduction.

Question 12.
Yogendra is an allottee of a flat in a real estate project promoted by the company, but he has not been delivered flat as per the Agreement. He has approached you to know, whether he can make an application under the Insolvency and Bankruptcy Code, 2016, and in what status he can make an application. Also, brief the timelines for the Corporate Insolvency Resolution Process. [Dec. 2019 (5 Marks)]
Answer:
Facts of Case: Yogendra is an allottee of a flat in a real estate project promoted by the company, but he has not been delivered flat as per the Agreement. He has approached you to know, whether he can make an application under the Insolvency and Bankruptcy Code, 2016, and in what status he can make an application.

Provision: As per Section 5(7) of the Insolvency & Bankruptcy Code, 2016, 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.

As per Section 5(8)(/), financial debt includes any amount raised under the transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

Explanation to Section 5(8) clarifies that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.

Conclusion: Thus, Yogendra being an allottee of a flat in a real estate project can make an application under the Insolvency & Bankruptcy Code, 2016 in the status of ‘financial creditor’.

Question 13.
ABC Ltd. has initiated insolvency proceedings against RS Ltd., for recovery of debt of ₹ 2.86 crores. ABC Ltd. intends to appoint Rahul, one of the employees of its statutory auditors, M/s ASA & Associates, Chartered Accountants, as its resolution professional. In the light of the statutory provisions, examine whether Rahul can be appointed as a resolution professional. [Dec. 2019 (3 Marks)]
Answer:
Facts of the case: ABC Ltd., has initiated insolvency proceedings against RS Ltd., for recovery of debt of ₹ 2.86 crores. ABC Ltd. intends to appoint Rahul, one of the employees of its statutory auditors, M/s ASA & Associates, Chartered Accountants, as its resolution professional

Provision: Resolution Professional [Section 5(27)]: Resolution professional means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.

Eligibility of criteria for appointing a person as insolvency professional is specified in Regulation 3 of the IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016.

He should not be a related party or employee. He shall fulfill the criteria for appointment as an independent director. He should make a disclosure as specified in the Code of Conduct.

Conclusion: Keeping in view of the above provisions Rahul being an employee of ABC Ltd. cannot be appointed as the resolution professional.

Question 14.
Describe the procedure mentioned under Section 53 of Insolvency and Bankruptcy Code (IBC), 2016 for distribution of assets in case of liquidation. [Dec. 2019 (3 Marks)]
Answer:
Waterfall arrangement or waterfall payment scheme describes the order in which creditors are paid. In a debt context, it is used to describe the sonority of debt liabilities.

Section 53 of the Insolvency & Bankruptcy Code, 2016 provides for the manner of distribution of assets in case of liquidation and order of priority of distribution. This order of priority is also known as the “waterfall arrangement” since each category of persons comes in priority after the previous one.

Distribution of assets [Section 53]: Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:
1. The insolvency resolution process costs and the liquidation costs paid in full.

2. The following debts which shall rank equally between and among the following –
(a) Workmen’s dues for the period of 24 months preceding the liquidation commencement date, and
(b) Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52.

3. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.

4. Financial debts owed to unsecured creditors.

5. The following dues shall rank equally between and among the following:
(a) any amount due to .the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(b) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

6. Any remaining debts and dues.

7. Preference shareholders, if any; and

8. Equity shareholders or partners, as the case may be.
Any contractual arrangements between recipients with equal ranking, if disrupting the order of priority shall be disregarded by the liquidator.

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients and the proceeds to the relevant recipient shall be distributed after such deduction.

Question 15.
National Company Law Tribunal (NCLT) has passed an order for the Commencement of Corporate Insolvency Resolution Process (CIRP) of Dora Travels Ltd., one of its directors has approached you to know the effects of “Moratorium” upon the commencement of CIRP. [Dec. 2019 (3 Marks)]
Answer:
On commencement of the CIRP, the adjudicating authority passes an order declaring moratorium for prohibiting all of the following by virtue of section 14 of the Insolvency and Bankruptcy Code, 2016:
(a) 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 under SARFAESI 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.

The order of moratorium shall have effect from the date of order till the completion of CIRP or date of approval of resolution plan or order of liquidation as the case may be.

Question 16.
Write a short note on Modes of winding-up. [June 2009 (4 Marks)]
Answer:
Meaning of Winding up: Winding up is the process of closing down the legal existence of a company or LLP. During this process, the assets of the entity are realized, its liabilities are paid off and any surplus is distributed amongst the contributors.

Company Act, 2013: Winding up is not defined in Companies Act, 2013
Under the Companies Act, 2013, the company may be wound up by any of the following modes:

  • By the NCLT Le. compulsory winding-up
  • Voluntary winding-up-Voluntary winding up is dealt with in Section 59 of the Insolvency and Bankruptcy Code, 2016
  • Winding-up by the Central Government under summary procedure.

Section 271 of Companies Act, 2013 deals with winding up by Tribunal, and Section 272 of Companies Act, 2013 deals with who can file an application for winding up.

Question 17.
Distinguish between: Winding-up and Insolvency. [June 2010 (4 Marks)]
Answer:
Following are the main points of distinction between winding-up and insolvency:

Points Winding-up Insolvency
Meaning Winding-up is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets or from contributions by its members. If the surplus is still left, it is distributed among the members. Insolvency is the inability of a debtor to pay debts as they fall due. A person is said to be insolvent when his liabilities exceed his assets and against whom Tribunal makes an order of adjudication.
Law The law relating to winding-up is contained in the Companies Act, 2013 and Insolvency & Bankruptcy Code, 2016 The law relating to insolvency in India is contained in the Insolvency & Bankruptcy Code, 2016.
When A company can be wound-up even if is Ímnanciallv sound e.g. voluntary winding-up. A person can be adjudged insolvent only when he is unable to pay his liabilities.
Effect of proceedings After completion of winding-up proceedings, the company is dissolved. After completion of insolvency proceedings, the insolvent person is discharged from all his liabilities.

Question 18.
Who can present the petition for winding-up? [Dec. 2011 (6 Marks)]
Answer:
Petition for winding-up [Section 272(1)]: An application for the wind- ) ing-up of a company can be presented by following:

  • Company itself.
  • Any creditor or creditors, including any contingent or prospective creditor or creditors.
  • Any contributory or Contributories.
  • Any combination of company, creditors, or Contributories.
  • Registrar of companies.
  • Any person authorized by the Central Government.
  • Central or State Government.

Question 19.
The terms ‘Winding-up’ and ‘Dissolution’ can be used interchangeably to denote cessation of the existence of a legal entity. [June 2019 (3 Marks)]
Answer:
The entire procedure for bringing about a lawful end to the life of a company is divided into two stages: ‘winding-up’ and ‘dissolution’. Wind-ing-up is the first stage in the process whereby assets are realized, liabilities are paid off and the surplus, if any, distributed among its members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law.

Following are the main points of distinction between winding-up and dissolution:

Points Winding-up Dissolution
Meaning Winding-up is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets or from contributions by its members. If the surplus is still left, it is distributed among the members. Dissolution brings an end to the company’s legal existence.
Stage Winding-up precedes the dissolution. In other words, first, winding-up of state of affairs occurs and after winding-up and all other proceedings, the company is dissolved. Dissolution is the final stage that leads to the corporate death of the company.
Effect In winding-up, the assets are realized and liabilities are paid but, the corporate status of the company continues. After dissolution, the corporate status of the company does not continue.
Liquidator The liquidator can present the company in winding-up proceedings. Once the order of dissolution is made, the liquidator cannot represent the company.
Proceedings Any person can proceed against the company which is being wound up. No proceedings can be started against the company which has been dissolved.
Order of Court Winding-up proceedings can be started without the intervention of the Court. Order of Court is essential for the dissolution of the company.

Question 20.
Yuvan Infra Ltd. is continuously making losses and the Directors of the Company are planning to voluntarily wind up the Company. As a Company Secretary advise on conditions and also advise them briefly on procedures for voluntary liquidation. [Dec. 2019 (5 Marks each)]
Answer:
Section 59(3) of the Insolvency & Bankruptcy Code prescribes the following conditions for voluntary liquidation.
1. A declaration by the majority of the directors of the company (in an affidavit) stating that they have made a full inquiry into the affairs of the company and formed an opinion that either the company has no debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation.

2. Company is not being liquidated to defraud any person. The brief procedure of voluntary liquidation of a corporate person under IBC includes:

  1. Submission of declaration that the company will be able to pay its dues and ¡s not being liquidated to defraud any person to ROC
  2. Passing special resolution for approving the proposal of voluntary liquidation and appointment of liquidator
  3. Public announcement inviting claims of all stakeholders
  4. Intimation to the ROC and the Board about the approval
  5. Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action
  6. Verification of claims
  7. Opening of a bank account in the name of the corporate person followed by the words ‘involuntary liquidation’ in a scheduled bank
  8. Sale of assets, recovery of monies due to corporate person, the realization of uncalled capital or unpaid capital contribution
  9. Distribution of the proceeds from realization
  10. Submission of the final report by the liquidator to the corporate per-son, ROC, and the Board and application to the National Company Law Tribunal (NCLT)
  11. Submission of NCLT order regarding the dissolution.

Setting Up of Business Entities and Closure Questions and Answers

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