According to Lord Justice Lindley “A company is an association of many persons who contribute money or monies worth to common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.” A Corporation or a Company is a legal entity formed by a group of individuals to engage in and operate a business that is separate and distinct from its owners. The purposes for which people may associate themselves are miscellaneous and includes economic as well as non-economic objectives. But, in general, the word ‘company’ is reserved for those associated with economic purposes.
Insolvency is a state of financial anguish in which a company or an individual or a partnership firm or a Limited Liability Partnership is unable to pay their bills or the debts they borrowed for various purposes. A bankruptcy, on the other hand, is an actual court order that depicts how an insolvent individual or a company will pay off their creditors, or how they will sell their assets in order to compensate. Both terms deal with excessive debts, but insolvency is a state that can lead to declaring bankruptcy. In simple terms, a corporate entity becomes insolvent when he or she is unable to pay back lenders on time.
The Companies Act, 1956, The Companies Act, 2013, The Sick Industrial Companies (Special Provisions) Act, 1985, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), The Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993 were the prevalent legislative frameworks in India which dealt with the insolvency and restructuring procedures of corporate entities, partnership firms, and individuals. But in the year 2016, considering the changing environment in the corporate sector, the Insolvency and Bankruptcy Code was enacted in India. The Insolvency and Bankruptcy Code, 2016, is extensive legislation that incorporates both the subsequent elements of a debtor’s economic collapse – rehabilitation and liquidation. The primary goal of the legislation is to restructure and resolve the insolvency of companies, partnership firms, and individuals as soon as possible in order to leverage the maximum value of such entities’ assets.
Financial creditors, Operational creditors and Corporate Applicants.
The Insolvency and Bankruptcy Code, 2016 provides a provision for an application for insolvency or bankruptcy of individuals, partnership firms, limited liability partnerships, and companies. CIRP is initiated after making an application before the NCLT, as it has the original jurisdiction in insolvency cases. CIRP is the process through which it is determined whether the person who has defaulted is capable of compensating the creditors or not. If a person is not capable of repaying the debt, the company is restructured or liquidated or declared insolvent by the authorities. Following are the steps to be followed for the resolution or liquidation of a corporate:
1. Application to NCLT: Any of the above mentioned three parties can apply to the National Company Law Tribunal (NCLT) bench of their jurisdiction under section 7, 9 and 10 of the Code. The application is made to agree that the Company is in the corporate insolvency resolution process. For this, the creditor needs to show the default payment of a debt that exceeds One Lakh rupees and within 14 days the NCLT has to pass an order either admitting or denying the application by stating its valid reasons. The different obligations the applicants have to be complied with when making they are applying before the NCLT.
2. Appointment of Resolution Professional: The Board of Directors are suspended as soon as the NCLT approves the application submitted for the initiation CIRP for that particular entity. Also, the management needs to select an independent ‘interim resolution professional’ (for temporary purposes) under section 17 of the Code to look after the legal procedures that need to be followed as according to the Code.. Further, from this point onward the management and administration department will not have any control over the company affairs till the end of the CIRP proceedings.
3. Verification and Analysis of Claims: At this stage, an interim resolution professional will call for different documents and verify the claims made by the creditors and also classify them on the basis of the debts that need to be repaid and actions to be taken. After that, within 30 days of acceptance into CIRP, the interim resolution professional shall have to submit a report regarding the further procedures and form a Committee of Creditors (CoC) which comprises of all the financial creditors, also called as a consortium of lenders of the corporate debtor.
4. Appointment of Resolution Professional: Within seven days of forming of the committee, the CoC will have to either decide on appointing the interim resolution professional as a (permanent) resolution professional or decide to replace the interim resolution professional with another Resolution Professional who must act in the best interest of the corporate debtor and strive towards revival of the entity.
5. Inviting Expression of Interest: The Resolution Professional, as per directions of the CoC will invite the Expression of Interest (EOI) from Prospective Resolution Applicants (“PRA”) to submit the Resolution Plan in accordance with Section 30 of IBC, 2016 which speaks about the Submission of Resolution Plan and the rules and regulations made under the same.
6. Approval of the Resolution Plan: The approval of Resolution plan requires the creditors to analyze the different plans that have been submitted. It is not necessary that the bid with the maximum value will be automatically approved, as other factors such as reasons for delay, number of EOIs received are also taken into consideration as well. A resolution plan for the revival of the company must be approved within 180 days from the commencement of CIRP by creditors. The NCLT can extend this period by another 90 days. Any person, management, creditors or a third party can propose such a plan that will benefit the creditors as well as the corporate debtor, and also it should not cause any adverse effect on the economy of the nation. The resolution professional is responsible to ensure that the plan meets the criteria and objectives set out in the Insolvency and Bankruptcy Code, 2016.
After considering the legalities and procedures upheld by The Insolvency and Bankruptcy Code, 2016, we can tell that the Corporate Insolvency Resolution Process has acclaimed a new era in handling insolvency proceedings and balancing the interests of all stakeholders. It has led to improved ease of doing business in Indian real estate and other corporate-related sectors, with regard to redressal mechanisms in case of a default. The non-existence of a system was a key lacuna in the implementation of insolvency in the Indian legal system before this legislation was brought into force. At present, in the wake of the enforcement of The Code, the insolvency process is streamlined and has an established timeline to conclude the progression.