Chapter 15 Petition for Corporate Insolvency Resolution Process – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.
Petition for Corporate Insolvency Resolution Process – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material
Question 1.
Explain the steps to be followed for the “Corporate Insolvency Resolution” process with time lines. (June 2017, 8 marks)
Answer:
Steps to be followed for the Corporate Insolvency Resolution Process (CIRP)
are as under:
(a) A financial creditor (himself or jointly with other financial creditors), an operational creditor or the corporate debtor (through Corporate applicant i.e. corporate debtor itself; or an authorised member, partner of corporate debtor; or a person who has control and supervision over the financial affairs of the corporate debtor) may initiate corporate insolvency resolution process in case a default is committed by corporate debtor. The financial creditor/operational creditor or corporate debtor as the case may be initiate the CIRP by making an application to NCLT under Sections 7, 8 and 10 respectively.
(b) Financial creditor on default and operational creditor after ten days from the date of delivery of demand notice can initiate CIRP.
(c) A financial creditor and corporate debtor shall propose the name of IRP and operational creditor may propose the name of IRP.
(d) NCLT within 14 days of receipt of application by order shall admit or reject application. Before rejecting, it should give notice to rectify the defects within 7 days of receipt of notice.
(e) NCLT to declare moratorium, appoint Interim Resolution Professional (IRP) for a term not exceeding thirty days from the date of appointment and cause public notice.
(f) An Insolvency Professional shall make a Public Announcement in newspaper in one English language and regional Language not later than three days from the date of his appointment. Public announcement shall contain the information such as hame and address of the corporate debtor under CIRP, name of the authority with which corporate debtor is registered. The last date for submission of claims and date on which CIRP will be closed.
(g) ‘Insolvency commencement date’ starts from the date of admission of application and it is to be completed within 180 days of commencement which can be extended by ninety days only one time by NCLT.
(h) Interim Resolution professional to constitute Committee of Creditors comprising of financial creditors within 30 days from the date of his appointment.
(i) Management of affairs of corporate debtors as a going concern, powers of Board of Directors or the partner of debtor shall stand suspended and exercised only by the IRP.
(j) Committee of creditors within 7 days of the constitution either resolve to appoint IRP as resolution professional (RP) or replace IRP with another RP.
(k) All decisions of Committee of Creditors shall be taken by vote not less than 66% of voting share of financial creditors. All financial creditors shall be part of Committee of Creditors and if any financial creditor is a related party of corporate debtor, then such financial creditor will not have any right of representation, participation or voting. If 76% of voting share of financial creditors consider the case complex and require extension of time beyond 180 days, the NCLT can grant a one-time extension of up to 90 days.
(l) Preparation of information memorandum by IRP for formulating Resolution Plan by resolution applicant. A resolution applicant means any person who submits resolution plan to the resolution professional. Upon receipt of resolution plans, Resolution Professional shall place it before the Committee of Creditors for its approval.
(m) Resolution Applicant prepares the Resolution Plan based on the information memorandum.
(n) Submission of Resolution Plan by Resolution Applicant to the Committee of Creditors by IRP and to be approved by 66% of voting share of financial creditors.
(o) IRP to submit approved Resolution Plan to NCLT which shall approve or reject it and order liquidation.
(p) The approved plan shall be binding on the corporate debtor, and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
(q) Moratorium ends on the date of approval’.
(r) Appeal may be made to NCLAT against the order passed by NCLT within 30 days from date of an order approving or rejecting the resolution plan.
Question 2.
Who are entitled and who are not eligible to make application to adjudicating authority for corporate insolvency resolution process as per Insolvency and Bankruptcy Code, 2016? (Dec 2017, 5 marks)
Answer:
Filing of an Application before the Adjudicating Authority:
Any of the following can file an application before the Adjudicating authorities:
- Financial Creditors are the creditors to whom corporate debtor owes financial debt.
- Operational Creditors are the creditors to whom corporate debtor owes operational debts such as claims for goods and services, employees, etc.
- Corporate Applicant means corporate debtor or its shareholders, partner, management personnel or Employees.
The following persons shall not be entitled to make application to NCLT for initiation of corporate insolvency resolution process:
(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 of the terms of resolution plan which was approved twelve months preceding the date of making application; or
(d) a corporate debtor in respect of whom a liquidation order has been passed so that finality of the liquidation order is ensured.
Question 3.
Unlike Companies Act, 2013 winding up can be resorted to only when resolution plan either could not be finalised or failed within 30 days of approval by adjudicating authority as per Insolvency and Bankruptcy Code, 2016. Are there any exceptions to such perception? Who all are entitled to move petitions for winding up? (June 2018, 5 marks)
Answer:
Section 33 provides for the liquidation of the corporate debtor in following four scenarios:
- Where the Adjudicating Authority does not receive a resolution plan
- Where the Adjudicating Authority rejects the resolution plan
- Where at any time before confirmation of resolution plan, the committee of creditors resolve to liquidate corporate debtor
- Where the corporate debtor violates the terms of the resolution plan
A petition to the Tribunal for the winding up of a company under Section 272(1) of the Act shall be presented by:
(a) the company;
(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (b) of Section 271, by the Central Government or a State Government.
Question 4.
There are certain persons who are not entitled to make application to NCLT for initiation of corporate insolvency resolution process. Explain. (Dec 2018, 5 marks)
Answer:
The following persons shall not be entitled to make application to NCLT for initiation of corporate insolvency resolution process:-
(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 of the terms of resolution plan which was approved twelve months preceding the date of making application; or
(d) a corporate debtor in respect of whom a liquidation order has been passed so that finality of the liquidation order is ensured.
Question 5.
Explain the procedure to be followed by the Adjudicating Authority on receipt of an application by the financial creditor for initiation of corporate insolvency resolution process. (Dec 2019, 5 marks)
Answer:
As per Sections 7(4), 7(5) and 7(7) of the Insolvency and Bankruptcy Code, 2016, following procedure is to be followed by Adjudicating Authority on receipt of an application by the financial creditor for initiation of Corporate Insolvency Resolution Process:
- The Adjudicating Authority shall, within fourteen days of the receipt of the application, 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.
- Where the Adjudicating Authority is satisfied that
(a) a default has occurred and the application 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 is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application: - Adjudicating Authority shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.
- The Adjudicating Authority shall communicate to the financial creditor and the corporate debtor, within seven days of admission or rejection of such application, as the case may be.
Question 6.
“The procedure for application to initiate Insolvency Resolution Process against a Corporate Debtor by operational creditor differs with application by financial creditors.” Explain briefly. (Dec 2020, 3 marks)
Answer:
(i) Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) enables a Financial Creditor (FC) either alone or jointly with any other FC may file application for initiating Corporate Insolvency Resolution Process (CIRP). On the other hand, an Operational Creditor (OC) may file application for CIRP only after serving 10 days’ notice of demand under section 8 of IBC and apply for CIRP under Section 9.
(ii) In case of a Financial Creditor, proposing name of Resolution Professional is mandatory but in case of Operational Creditor it is optional.
(iii) Existence of default is required in case of Financial Creditor whereas nonexistence of dispute is necessary in case of Operational Creditor.
Question 7.
“Initiation of Corporate Insolvency Resolution Process puts brake on any other legal Proceedings against Corporate Debtor (CD) undergoing CIRP during the process.” Offer your views on the statement. (Aug 2021, 5 marks)
Answer:
Section 14 of the Insolvency and Bankruptcy Code, 2016 empowers the adjudicating authority to declare moratorium while passing the orders for initiating Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD).
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 judgement, 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 the 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.
The effect of moratorium are deferred till conclusion of CIRP.
Thus, the statement is true to the extent stated above.
Question 8.
Who are disentitled to make an application to initiate corporate insolvency resolution process under IBC, 2016? (Dec 2021, 3 marks)
Answer:
Section 11 of the Insolvency and Bankruptcy Code 2016 disentitles the following persons to make an application to initiate corporate insolvency resolution process:
a. a corporate debtor undergoing a corporate insolvency resolution process or a pre-packaged insolvency resolution process;
(aa) a financial creditor or an operational creditor of a corporate debtor undergoing a pre-packaged 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
(ba) a corporate debtor in respect of whom a resolution plan has been approved under Chapter lll-A, twelve months preceding the date of making of the application; or
c. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
d. a corporate debtor in respect of whom a liquidation order has been – made.
Question 9.
An application filed before National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 can be withdrawn before admission but not after admission. Discuss. (June 2022, 5 marks)
Question 10.
Corporate Insolvency Resolution Process (CIRP) against A Ltd. was initiated on application by its financial Creditors but the process was not completed within the time limit prescribed in terms of Section 12(1) of the Insolvency and Bankruptcy Code, 2016 (IBC). Before completion of CIRP timeline, Committee of Creditors in its meeting voted at 70 per cent voting share in favour of a proposal to seek extension for a period of 60 days. Can the Resolution Professional file application seeking extension of CIRP on the basis of voting results so obtained ? (Dec 2020, 5 marks)
Answer:
(i) Section 12 (1) of the Insolvency and Bankruptcy Code, 2016 (IBC) stipulates that the Corporate Insolvency Resolution Process (CIRP) must be completed within 180 days of the initiation.
(ii) In the extreme circumstances if CIRP is not completed the Resolution Professional (RP) shall file an application to Adjudicating Authority for extension of time, only when instructed by the Committee of Creditors resolve with 66% voting shares.
(iii) Section 12(3) provides that on receipt of an application, 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:
Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once. Provided further that the Corporate Insolvency Resolution Process shall mandatorily be completed within a period of 330 days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.
(iv) In the given case, there is a resolution by the Committee of Creditors with 70% voting share, and hence, the RP can file application but for extension of only 60 days as resolved.
(v) On the application, the Adjudicating Authority will grant extension only when it is satisfied, in other words the application need to be drafted with cogent reason and mere annexing the resolution is not sufficient.
Question 11.
Laxmi Bank Ltd. acquired 10 per cent convertible debentures in Bhaskar Ltd. In terms of the issue in the year 2012 these debentures were converted into the equity shares in Bhaskar Ltd. Consequent to conversion Laxmi Bank Ltd. became the owner of 5 per cent equity holding in Bhaskar Ltd. Further Laxmi Bank Ltd. provided a loan of ₹ 10 Crore to Bhaskar Ltd. that became due in the year 2018. Bhaskar Ltd. became defaulter in repayment of loans not only to Laxmi Bank Ltd. but also some other Banks. On the application by ICID Bank, the Adjudicating Authority initiated Corporate Insolvency Resolution Process (CIRP) and appointed an Interim Resolution Professional (IRP). Committee of Creditors constituted by IRP include Laxmi Bank Ltd. ICID Bank objected on the ground that Laxmi Bank Ltd. is a related party that should not have any right of representation, participation or voting. Examine the issue and offer your views. (Dec 2020, 5 marks)
Answer:
(i) As per first proviso to Section 21 (2) of the Insolvency and Bankruptcy Code, 2016 (IBC) no related party to the Corporate Debtor, even if it is a financial creditor, has any right of participation, representation or voting at the meeting of Committee of Creditors.
(ii) However, as per the second proviso to Section 21 (2) this restriction is not applicable in case a financial creditor is governed by a financial sector regulator and will not be considered as a related party solely on account of conversion or substitution of debt into equity or instruments convertible in to equity shares or completion of such transactions as may be prior to the Insolvency commencement date.
(iii) In the given case, allotment of the shares to Laxmi Bank Ltd. was done on account of conversion of debt into equity and being a Bank regulated by RBI (financial sector regulator), Laxmi Bank Ltd. will not be considered as a related party.
(iv) Thus, the objection raised by ICID bank is not tenable.
Question 12.
PL Enterprise, an Operational Creditor to XYZ Ltd., a corporate debtor is in the process of making an application to NCLT for initiating the insolvency resolution process. Advise PL enterprise about the enclosures to such an application. (Dec 2021, 5 marks)
Answer:
Section 9 (3) of the Insolvency and Bankruptcy Code, 2016 lays down that an application by the operational creditor shall, be accompanied with the following documents:
(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.
Question 13.
Can a financial creditor file an application for corporate insolvency resolution process even if the default is in respect of debt of another financial creditor?
Answer:
The Explanation appended to section 7(1) makes it clear that for the purposes of section 7(1), a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. Thus, a financial creditor can file an application for corporate insolvency resolution process even if the default is in respect of debt of another financial creditor.
Question 14.
What is the minimum amount of default defined under section 4 of the Insolvency and Bankruptcy Code, 2016 for making application relating to the insolvency and liquidation of corporate debtors?
Answer:
Part II of the Insolvency and Bankruptcy Code, 2016 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 crore rupees.
Question 15.
What is the Time frame for ascertaining the existence of default by Tribunal?
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 16.
Define Financial debt under The Insolvency and Bankruptcy Code, 2016.
Answer:
A financial debt 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 17.
Can corporate applicant initiate the corporate insolvency resolution process on mere likelihood of inability to pay debts?
Answer:
The corporate applicant can only initiate the corporate insolvency resolution process upon the occurrence of a default and not on mere likelihood of inability to pay debts.
Question 18.
Special resolution passed by the shareholders of the corporate debtor or resolution passed by at least three-fourth of the total number of partners of the corporate debtor is must. Comment.
Answer:
Sub-section (3) of section 10 of the Code was amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The (Second Amendment) Act, 2018 provided for the requirement of special resolution passed by the shareholders of the corporate debtor or resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, for initiation of corporate insolvency resolution process by corporate applicant.
Question 19.
Can an application made under Insolvency and Bankruptcy Code be withdrawn?
Answer:
Section 12A 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.
Question 20.
Describe the terms ‘Financial Creditor’ and ‘Operational Creditor’ and ‘ Corporate Debtor’?
Answer:
“Financial creditor”
It 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.
“Operational creditor”
It means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
“Corporate debtor”
It means a corporate person who owes a debt to any person
Question 21.
Describe the term “financial debt” and “operational debt”.
Answer:
Financial Debt:
“Financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes –
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised 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 nonrecourse 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-clauses (a) to (h) of this clause;
Operational Debt:
“Operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.
Question 22.
Distinguish between Operational Creditor and Financial Creditor.
Answer:
| Operational Creditor | Financial Creditor |
| Meaning: This means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred; | Meaning: This 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; |
| Meaning of “operational debt” It means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority | Meaning of Financial debt:
“Financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes – (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised 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 nonrecourse 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-clauses (a) to (h) of this clause; |
Question 23.
Who can file application under Adjudicating authorities unde Insolvency and Bankruptcy Code 2016 for corporate insolvency resolution?
Answer:
Any of the following can file an application before the Adjudicating authorities:
- Financial Creditors are the creditors to whom corporate debtor owes financial debt
- Operational Creditors are the creditors to whom corporate debtor owes operational debts such as claims for goods and services, employees, etc.
- Corporate Applicant means corporate debtor or its shareholders, partner, management personnel or employees.
Question 24.
Briefly explain the concept of ‘Pre-packed Insolvency Resolution Process’. Also explain the governing framework?
Answer:
Micro, small, and medium enterprises (MSMEs) are critical for India’s economy. They contribute significantly to gross domestic product and provide employment to a sizeable population.
The COVID-19 pandemic has impacted their business operations and exposed many of them to financial stress. Resolution of their stress requires different treatment, due to the unique nature of their businesses and simpler corporate structures.
Therefore, it was considered expedient to provide an efficient alternative insolvency resolution process under the Code for corporate MSMEs, that ensures quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses, and which preserves jobs.
Accordingly, President promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on 4th April, 2021 to introduce PPIRP under the Code for this purpose.
PPIRP is built on trust and honours the honest MSME owners by enabling resolution when the company remains with them. PPIRP is available for resolution of stress of corporate MSMEs. It is available as an alternate option, should the stakeholders like to use it.
PPIRP has the features, which make a CIRP sacrosanct, and has the rigour and discipline of the Corporate Insolvency Resolution Process (CIRP).
It is informal up to a point and formal thereafter. It blends debtor-in-possession with creditor-in-control. It is neither a fully private nor a fully public process – it allows the company, if eligible under section 29A, to submit the Base Resolution Plan (BRP) which is exposed to challenge for value maximisation. It safeguards the rights of stakeholders as much as in CIRP and has adequate checks and balances to prevent any potential misuse. It entails a limited role of the courts and IPs.
Unlike CIRP, it does not yield liquidation if there is no resolution plan. Though PPIRP and CIRP are alternate options, some stakeholders may prefer one over the other in certain circumstances.
Governing Framework:
The provisions governing PPfRP are available in:
- Insolvency and Bankruptcy Code, 2016, as amended by the Insolvency and Bankruptcy (Amendment) Ordinance, 2021 (Chapter 11 l-A contains Section 54A to 54 P);
- Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Rules, 2021; and
- Insolvency and Bankruptcy Board of India (Pre Packaged Insolvency Resolution Process) Regulations, 2021.
Question 25.
Who is eligible for ‘Pre-packed Insolvency Resolution Process (PPIRP)’?
Answer:
A Corporate Debtor (CD), which is an MSME under sub-section (1) of the section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, is eligible to apply for initiation of PPIRP, if it-
- has committed a default of at least 10 lakh;
- is eligible to submit a resolution plan under section 29A of the Code;
- has not undergone a PPIRP during the three years preceding the initiation date;
- has not completed a CIRP during the three years preceding the initiation date;
- is not undergoing a CIRP; and
- is not required to be liquidated by an order under section 33 of the Code.
To evidence that the CD is an MSME, the application shall attach either a copy of the latest and updated Udyam Registration Certificate or proof of investment in plant and machinery or equipment and turnover as per Notification No. 2119(E) dated 26th June, 2020 of the Ministry of MSMEs.
Question 26.
Explain the ‘pre-initiation phase’ of ‘Pre-packed Insolvency Resolution Process (PPIRP)’?
Answer:
PPIRP envisages a hybrid process, where pre-initiation phase is largely informal and post-initiation stage is formal.
The informality at pre-initiation stage offers flexibility for the CD and its creditors to swiftly explore and negotiate the best way to resolve stress in the business, while the post-initiation stage drives value maximisation and bestows the resolution plan with the statutory protection.
The following activities need to be undertaken in pre-initiation stage:
For seeking approval of creditors under section 54A(2)(e) and (3), the applicant (corporate applicant filing an application for initiation of PPIRP) shall convene meetings of the Unrelated Financial Creditors (UFCs), that is, financial creditors who are not related parties of the CD. Where the CD has no financial debt or where all financial creditors are related parties, the applicant shall convene meetings of unrelated Operational creditors (UOCs) and the UOCs shall perform the same duties and functions as the UFCs.
For convening a meeting of UFCs, the applicant shall serve the notice of the meeting to UFCs at least five days before the date of the meeting (s) unless a shorter time is agreed to by all of them. The notice of the meeting shall indicate the date, time, and venue of the meeting and specific agenda items for discussion.
The applicant shall enclose a list of creditors and the amount due to *’ each of them in Form P2, along with the notice convening the meeting seeking approval for appointment of an IP as RP.
In the meeting of UFCs, creditors having at least 10% of the value of debt shall propose the name of an IP eligible under the Regulations, for appointment as RP. An IP is eligible to be appointed as RP 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. A person is considered independent if he meets the requirements specified under regulation 7.
The UFCs representing not less than 66% in value of debt due to such creditors shall approve the appointment as RP and the terms of appointment in Form P3. The terms of appointment shall include:
(a) fee payable to him for performing duties in relation to pre-initiation phase under section 54B,
(b) fee payable to him and expenses to be incurred by him for conducting the PPIRP, and
(c) fee payable to him and expenses to be incurred by him in case management of the CD is vested with him under section 54J.
The majority of director/partners of the CD shall make a declaration in Form P6 stating -(a) that the CD shall file an application for initiation within a definite time not exceeding 90 days, (b) that the PPIRP is not being initiated to defraud any person, and (c) the name of the IP approved by creditors to be appointed as the RP.
The members of the CD shall pass a special resolution, or at least three-fourth of the total number of partners of the CD shall pass a resolution, approving the filing of an application for initiating PPIRP as required in section 54A(2)(g).
The CD shall prepare a BRP in conformity with the requirements under section 54K.
Along with the notice for convening the meeting(s) seeking approval for filing of an application for initiating PPIRP, the applicant shall enclose (a) a list of creditors and the amount due to each of them in Form P2, (b) declaration in Form 6, (c) the resolution of members or partners referred to in section 54A(2)(g), and (d) the BRP.
In the meeting of UFCs, creditors representing not less than 66% in value of debt due to such creditors shall approve filing of application for initiation of PPIRP of the CD under section 54A(3), in Form P4.
The Insolvency Professional(IP) (proposed to be appointed as the RP) shall ascertain creditors in class(es), if any, from the list of creditors in Form P2, identify three IPs to act as authorised representative (AR) and obtain their consent in Form P5, seek choice of creditors in the class, select the IP, who is the choice of the highest number of creditors in the class to act as the AR, and inform the name of the IP, along with his consent in Form P5, to the applicant, in accordance with regulation 15.
The IP (proposed to be appointed as the RP) shall prepare report in Form P8 confirming if the CD is eligible for PPIRP and the BRP confirms the requirements
Application for Initiation:
(i) Only a corporate applicant can file an application for initiation of PPIRP.
(ii) The applicant shall file the application in Form 1, in electronic form, before the AA for initiating PPIRP.
(iii) The application shall be accompanied by the following documents:
(a) Record of default;
(b) Consent of the IP proposed to be appointed as RP, in Form P1;
(c) Approval of UFCs for initiation, in Form P4;
(d) Consent of the IP proposed to act as AR, if any, in Form P5;
(e) Declaration by Directors/Partners, in Form P6;
(f) Members’ resolution or Partners’ resolution;
(g) Declaration by CD regarding avoidance transaction(s), in Form P7;
(h) Report of the RP, in Form P8;
(i) Audited financial statements of the last two financial years;
(j) Provisional financial statements for current financial year made up to the date of declaration under section 54A(2)(f);
(k) Latest and updated Udyam Registration Certificate, or proof that the CD is an MSME; Affidavit stating that the CD is eligible under section 29A of the Code to submit resolution plan in the PPIRP of the CD;
(l) A statement of affairs made up to a date not earlier than 14 days from the date of application;
(m) A statement giving the names and addresses of the members or partners of the CD, with details of their respective shareholdings;
(n) Proof that the application fee of 15,000 has been paid;
(o) Proof that a copy of the application has been served to the IBBI; and
(p) Document that records the authority of the applicant to make the application, where the applicant is a member or partner of the CD.
(iv) The applicant shall serve a copy of the application (for initiating PPIRP) to the BBI before filing it with the AA.
(v) Within 14 days of the receipt of the application, the AA shall admit the application, if the application is complete or reject the same, if incomplete. However, before rejecting the application, the AA shall provide a period of seven days to the applicant for rectifying the defects, if any, in the application. The AA shall also deal with any application for initiation of CIRP pending for admission in accordance with the Code while deciding on the application.
(vi) The PPIRP shall commence on the date of admission of the application.
(vii) The AA shall, on the PPIRP commencement date along with the order of admission, declare a moratorium of the purposes of sub-sections (1) and (3) of section 14 of the Code, appoint the IP named in the application as the RP, and cause a public announcement to be made by the RP.
(viii) The duties of the IP shall cease if the application is either not filed within the time specified in declaration in Form 6 or is not admitted by the AA.
Question 27.
Explain the ‘post-initiation phase’ of ‘Pre-packed Insolvency Resolution Process (PPIRP)’?
Answer:
‘Post-initiation phase’ of ‘Pre-packed Insolvency Resolution Process (PPIRP)’is as under:
i) The process is required to be completed within a time frame of 120 days from the PPIRP commencement date.
ii) During the PPIRP, (a) the management of the affairs of the CD shall continue to vest in the Board of Directors / the partners of the CD; (b) the Board of Directors / the partners of the CD shall make every endeavour to protect and preserve the value of the property of the CD, and manage its operations as agoing concern; and (c) the promoters, members, personnel and partners of the CD Shall exercise and discharge their contractual or statutory rights and obligations in relation to the CD.
iii) The CD shall, within two days of the PPIRP commencement date, submit to the RP, updated as on that date, (a) a list of claims, along with details of the respective creditors, their security interests and guarantee’s, in Form P10, and (b) a preliminary information memorandum (PIM) containing information relevant for formulating a resolution plan. If any person sustains any loss or damage as a consequence of the omission of any material information or inclusion of any misleading information in the list of claims or the PIM, every person who (a) is a promoter or director or partner of the CD at the time of submission of the list of claims or the PIM, or (b) has authorised the submission of the list of claims or the PIM, shall be liable to pay compensation.
iv) The CD shall submit the BRP to the RP within two days of the PPIRP commencement date. It may revise the BRP if permitted by the CoC.
v) The RP shall make a public announcement, in Form P9, within two days of the commencement of the process in the manner specified in regulation 19.
vi) The RP shall exercise powers and carry out duties as required under section 54F.
Approval of Resolution Plan:
i) If BRP does not impair claims owed to operational creditors (OCs), the CoC may approve it for submission to the AA.
ii) If the CoC does not approve the BRP or the BRP impairs the claims of OCs, the RP shall invite prospective resolution applicants to submit resolution plans to compete with the BRP. He shall publish brief particulars of the invitation for resolution plans in Form P11, not later than 21 days from the PPIRP commencement date, in accordance with regulation 43.
iii) The invitation for resolution plans shall detail each step in the process, and the manner and purposes of interaction between the RP and the resolution applicant, along with corresponding timelines. It shall include
(a) the basis for evaluation;
(b) the basis for considering a resolution plan significantly better than another resolution plan;
(c) the tick size; and
(d) the manner of improving a resolution plan. It shall not require any non-refundable deposit for submission of or along with resolution plan.
iv) The resolution plans received in response to invitation and complying with the requirements of the Code and the Regulations shall be evaluated on the basis for evaluation. The resolution plan which gets the highest score shall be selected as best alternate plan (BAP) for competition with the BRP.
v) The CoC may consider BRP for approval if no resolution plan is received.
Question 28.
Explain the circumstances in which ‘Pre-packed Insolvency Resolution Process (PPIRP)’can be closed?
Answer:
The PPIRP closes in the following circumstances:
- On approval of either the BRP or the BAP by the AA.
- On expiry of 90 days if no resolution plan is submitted to the AA for approval.
- On rejection of resolution plan by the AA.
- On approval by the AA of application filed by the RP for termination of PPIRP, where the CoC approves termination with 66% of voting share.
- On conversion into CIRP based on an application filed by the RP, where the CoC approves so with 66% of voting share, and the CD is eligible for CIRP. The RP of the PPIRP is appointed as the IRP of the CIRP.
- On an order of termination in case either no resolution plan is approved by CoC or the resolution plan approved by the CoC does not result in change in management, where the AA has vested the management of the CD with the RP under section 54J.
Petition for Corporate Insolvency Resolution Process Notes
Corporate insolvency resolution process
- 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.
Persons who may Initiate Corporate Insolvency Resolution Process
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.
Financial creditor and Operational creditor
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 and 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.
Initiation of Corporate Insolvency Resolution Process by Financial Creditor
Section 7(3) of the Code mandates that the financial creditor shall, along with the application for initiating corporate insolvency resolution process, furnish a proof of default and the name of a resolution professional proposed to act as the interim resolution professional in respect of the corporate debtor.
The NCLT vide Order dated 12th May, 2020 stated that default record from Information Utility must be filed with all new petitions filed under Section 7 of the Code and no new petition shall be entertained without record of default.
Time frame for ascertaining the existence of default.- 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.
Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same. [Section 7(4)].
Supreme Court judgment: time period of 14 days is directory and not mandatory held in the matter of Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and Others.
Insolvency Resolution by Operational Creditor
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.
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 –
- existence of a dispute
- the payment of unpaid operational debt
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 the operational creditor does not receive payment from the corporate debtor or notice of the dispute under subsection (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order –
- admit the application
- reject the application
The corporate insolvency resolution process shall commence from the date of admission of the application.
Initiation of corporate insolvency resolution process by corporate applicant / corporate debtor
- Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
- The Adjudicating Authority shall, within fourteen days of the receipt of the application, by an order-
- admit the application
- reject the application
- The corporate insolvency resolution process shall commence from the date of admission of the application.
Corporate applicant
“Corporate applicant” means –
- corporate debtor
- a member or partner of the corporate debtor
- an individual who is in charge of managing the operations and resources of the corporate debtor
- a person who has the control, and supervision over the financial affairs of the corporate debtor
Persons Not Entitled to Make Application
- A corporate debtor undergoing a corporate insolvency resolution process
- A corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application
- a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter
- a corporate debtor in respect of whom a liquidation order has been made.
Time-limit for Completion of Insolvency Resolution Process
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.
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 sixty-six per cent, of the voting shares.
On receipt of an application under sub-section (2), 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.