Individual/Firm Insolvency – CS Professional Study Material

Chapter 20 Individual/Firm Insolvency – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Individual/Firm Insolvency – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
“Committing default or failure of Resolution Plan may lead to liquidation of a body corporate under Insolvency and Bankruptcy Code, 2016 but could there be other circumstances for which a Tribunal may order for winding up?” Examine and explain. (Dec 2018, 5 marks)
Answer:
In case the Resolution Professional is unable to come-up with a resolution plan approved by at least sixty six percent of the Committee of Creditors or the plan submitted does not confirm the requirements of the Code, the Tribunal may pass an order of liquidation of the Corporate Debtor in terms of Section 33 of the Insolvency and Bankruptcy Code, 2016 so also in case the approved resolution plan is contravened by the Corporate Debtor.

Apart from the above, Section 271 of the Companies Act, 2013 enumerates circumstances such as company’s own resolution, fraudulent or felony activities, default in filing financial statements or annual returns for more than 5 consecutive years or just and equitable reasons for which Tribunal may order liquidation. If the company has acted against the interests of the sovereignty and integrity of India, the security of the State then also it may be wound-up.

Individual/Firm Insolvency - CS Professional Study Material

Question 2.
Explain the objective and procedural requirements for issuance of Public Notice under section 102 of the Insolvency and Bankruptcy Code, 2016. (Dec 2019, 5 marks)
Answer:
The objective of Section 102 of the Insolvency and Bankruptcy Code, 2016 is to provide an opportunity to all the creditors to be a part of the repayment plan. Section 102 provides for the issuance of a public notice by the Adjudicating Authority inviting claims from the creditors of the debtor.

Issuance of public notice – According to sub-Section (1) of Section 102 of the Code, the Adjudicating Authority shall issue a public notice within seven days of passing the order under section 100 inviting claims from all creditors within twenty-one days of such issue.

According to sub-section (3) of Section 102 of the Code, such notice shall be-
(a) published in at least one English and one vernacular newspaper which is in circulation in the state where the debtor resides;
(b) affixed in the premises of the Adjudicating Authority; and
(c) placed on the website of the Adjudicating Authority.

Inclusion of certain details – According to sub-section (2) of Section 102 of the Code, the notice under sub-section (1) shall include-
(a) details of the order admitting the application;
(b) particulars of the resolution professional with whom the claims are.to be registered; and
(c) the last date for submission of claims.

Individual/Firm Insolvency - CS Professional Study Material

Question 3.
Briefly comment on the rights of Secured Creditors in a Repayment Plan under Section 105 of the Insolvency and Bankruptcy Code, 2016. (Dec 2020, 5 marks)
Answer:
Section 105 of the Insolvency and Bankruptcy Code, 2016 deals with repayment plan.

According to Section 105 the debtor shall prepare, in consultation with the resolution professional, a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs.

The repayment plan may authorise or require the resolution professional to –
(a) carry on the debtor’s business or trade on his behalf or in his name; or
(b) realise the assets of the debtor; or
(c) administer or dispose of any funds of the debtor.

The repayment plan shall include the following, namely:
(a) justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan
(b) provision for payment of fee to the resolution professional
(c) such other matters as may be specified.

Individual/Firm Insolvency - CS Professional Study Material

Question 4.
“A discharge order in case of individual or firm insolvency permits the debtor to start business afresh having freed from the qualifying debts of the insolvent past. Explain briefly the provisions relating to discharge order. (Aug 2021, 3 marks)
Answer:
According to Section 79(2)(13) of the Insolvency and Bankruptcy Code, 2016 “discharge order means an order passed by the Adjudicating Authority discharging the debtor under sections 92,119 and section 138, as the case may be.

Section 92 of the Insolvency and Bankruptcy Code, 2016 provides for the passing of a discharge order by the adjudicating authority at the end of the moratorium period for discharge of the debtor from the qualifying debts.

Further, the discharge order shall also provide for the discharge of penalties, penal interest and other sums owed under any contract, in respect of the qualifying debts, from the date of the application for fresh start to the date of the discharge order. A discharge order discharges only the debtor. Such discharge order is recorded in the financial history of the debtor.

Section 92 does not discharge the debtor from any debt not included in 92 (2) and from any liability not included in Section 92(3).

Individual/Firm Insolvency - CS Professional Study Material

Question 5.
“Any modification suggested by creditors need consent of the debtor in respect of Repayment plan in case of individual or firm insolvency”. Comment briefly on the statement narrating the provisions in respect of conducting meetings and rights of secured creditors to attend. (Aug 2021, 3 marks)
Answer:
Section 108 of the Insolvency and Bankruptcy Code, 2016 provides for the conduct of meeting of creditors by the resolution professional. In the meeting, the creditors may decide to approve, modify or reject the repayment plan.

If modifications are suggested by the creditors, the Resolution Professional ensure that consent of the debtor is obtained for each modification.

The meeting of the creditors shall be conducted in accordance with the provisions of sections 108 to 111 of the Code. In the meeting of the creditors, the creditors may decide to approve, modify or reject the repayment plan. A secured creditor if attends any such meeting shall be deemed to have relinquished the security unless submits an affidavit for unsecured part of the debt, if any.

Individual/Firm Insolvency - CS Professional Study Material

Question 6.
What are rights of Secured Creditors in relation to Repayment Plan in case of insolvency of individual or firm?
Answer:
Section 110 sets out the rights of the secured creditors ¡n a repayment plan prepared under the present chapter i.e., Chapter Ill of Part Ill of the Code. A secured creditor may or may not like to give up on his right to enforce security during the period of implementation of the repayment plan. A secured creditor participating in the meetings of the creditors and voting in relation to the repayment plan will be required to give up his right to enforce his security.

However, in the event the secured creditor does not want to give up hfs right to enforce his security, he may vote on the repayment plan in respect of his unsecured debt, and his consent will be required if any term of the repayment plan affects his right to enforce security.

Individual/Firm Insolvency - CS Professional Study Material

Question 7.
Comment on effect of order of adjudicating authority on repayment plan?
Answer:
Section 115 provides that a repayment plan approved by the adjudicating authority under section 114 is binding on all the creditors mentioned in the repayment plan as well as the debtor and take effect as if proposed by the debtor in the meeting.

Individual/Firm Insolvency - CS Professional Study Material

Individual/Firm Insolvency Notes

Initiation of insolvency resolution process by debtor
According to sub-section (1) of section 94, a debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.

Application for insolvency resolution by Partner of firm
Sub-section (2) makes it clear that where the debtor is a partner of a firm, such debtor shall not apply under this Chapter (i.e., Chapter III of Part III) to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly.

Debts in respect of which application cannot be submitted (Excluded debt)

  • liability to pay fine imposed by a court or tribunal
  • liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation
  • liability to pay maintenance to any person under any law for the time being in force
  • liability in relation to a student loan

Individual/Firm Insolvency - CS Professional Study Material

Who is not entitled to initiate the insolvency resolution process
A debtor shall not be entitled to make an application if he is –
(a) an undischarged bankrupt;
(b) undergoing a fresh start process;
(c) undergoing an insolvency resolution process; or
(d) undergoing a bankruptcy process.

Application by Creditor to Initiate Insolvency Resolution Process

  • a creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process
  •  In relation to a partnership debt owed to the creditor, the creditor may file an application against the firm or one or more of the partners
  • an application shall be accompanied with:
  • details and documents relating to the debts owed by the debtor to the creditor
  • the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand
  • relevant evidence of such default or non-repayment of debt

Interim-moratorium

  • Section 96 provides for interim moratorium which shall commence on the date of the application initiating the insolvency resolution and shall cease to have effect on the date of admission of such application.
  • During the period of interim moratorium any pending legal action or proceeding jn respect of the debts of the debtor shall be deemed to have been stayed and secondly, an embargo will be placed on the creditors for the commencement of any legal action or proceeding in respect of the debts of the debtor.
  • The purpose of this interim moratorium is to provide a facilitative environment for the debtor to initiate the process.

Individual/Firm Insolvency - CS Professional Study Material

Appointment of Resolution Professional
Section 97 of the Code provides for the appointment of resolution professional. An application for insolvency resolution process may be made by the debtor either personally or through a resolution professional. In the former case, the Insolvency and Bankruptcy Board nominates a resolution professional and in the latter case, the adjudicating authority directs the regulatory board to do a background check on the resolution professional who has filed the application. In both cases, the final appointment of the resolution professional is done through an order of the adjudicating authority.

Report by resolution professional
Sub-section (1) of section 99 provides that the resolution professional shall examine the application referred to in section 94 or section 95, as the case may be, within ten days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.

Admission or Rejection of Application
Section 100 requires the adjudicating authority to pass an order either accepting or rejecting the application for insolvency resolution process within the prescribed time frame of 14 days from the date of submission of the report under section 99.

Where the Adjudicating Authority admits an application under sub-section (1), it may, on the request of the resolution professional, issue instructions for the purpose of conducting negotiations between the debtor and creditors and for arriving at a repayment plan

If the application referred to in section 94 or 95, as the case may be, is rejected by the Adjudicating Authority on the basis of report submitted by the resolution professional or that the application was made with the intention to defraud his creditors or the resolution professional, the order under sub-section (1) shall record that the creditor is entitled to file for a bankruptcy order under Chapter IV.

Individual/Firm Insolvency - CS Professional Study Material

Moratorium
Section 101 provides that an order admitting an application for insolvency resolution has the effect of a fresh moratorium from the date of such admission for a period of one hundred and eighty days, or up to the date on which an order approving the repayment plan is passed by the adjudicating authority under section 114, whichever is earlier.

Effect of moratorium
According to sub-section (2), during the moratorium period:
(a) any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed;
(b) the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and
(c) the debtor shall not transfer, alienate, encumber or dispose of any of the assets or his legal right or beneficial interest therein;

Public Notice and Claims from Creditors

  • the Adjudicating Authority shall issue a public notice within seven days of passing the order under section 100 inviting claims from all creditors within twenty-one days of such issue
  • Section 103 requires the creditors to register their claims with the concerned resolution professional by sending the details of their claims.
    Section 104 provides for the preparation of list of creditors within thirty days from the date of the notice by the resolution professional. Such a list is required for the purposes of organising meetings of creditors

Individual/Firm Insolvency - CS Professional Study Material

Repayment plan

  • Section 105 of the Code provides for the preparation of a repayment plan by the debtor in consultation with the resolution professional.
  • The repayment plan will contain terms as per which the debtor will repay his debts to his creditors.
  • the resolution professional shall submit the repayment plan along with his report on such plan to the Adjudicating Authority within a period of twenty-one days

Summoning of Meeting of Creditors

  • resolution professional shall issue a notice calling the meeting of the creditors at least fourteen days before the date fixed for such meeting
  • the notice sent under sub-section (1) shall state the address of the Adjudicating Authority to which the repayment plan and report of the resolution professional on the repayment plan has been submitted
  • In the meeting, the creditors may decide to approve, modify or reject the repayment plan.
  • If modifications are suggested by the creditors, the resolution professional shall ensure that consent of the debtor is obtained for each modification
  • Section 111 of the Code provides that the repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors.
  • Section 112 requires the resolution professional to prepare a report on the proceedings of the meeting of the creditors on repayment plan.

Individual/Firm Insolvency - CS Professional Study Material

Order of Adjudicating Authority on Repayment Plan

  • the Adjudicating Authority shall by an order approve or reject the repayment plan on the basis of the report of the meeting of the creditors submitted by the resolution professional
  • Where the Adjudicating Authority is of the opinion that the repayment plan requires modification, it may direct the resolution professional to re-convene a meeting of the creditors for reconsidering the repayment plan

Implementation and Supervision of Repayment Plan
Section 116 requires the resolution professional appointed under section 97 or under section 98 to supervise the implementation of the approved repayment plan

Repayment Plan Coming to End Prematurely
Section 118 makes provision regarding the premature ending of repayment plan. A repayment plan is deemed to have come to an end prematurely if it does not get fully implemented within the period as mentioned in the repayment plan.

The resolution professional is required to provide a report and the adjudicating authority shall pass an order stating that the plan has not been completely implemented and the debtor or the creditor whose claims have not been satisfied are entitled to file for bankruptcy of the debtor

Individual/Firm Insolvency - CS Professional Study Material

Discharge Order
On the basis of the repayment plan, the resolution professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order.

Leave a Comment

Your email address will not be published. Required fields are marked *