Insolvency Petition Procedure in India

The law requires everyone to pay their debts in time. But what if a person lacks any source of income and has comparatively big debts to pay? Does law become a savior in such a scenario? India has quite a few such examples of big names of business tycoons who led a kingly life while in India and had to flee overnight to other countries after being a financial defaulter. Not everyone can evade the situation by flying to another nation and that is how the nation brought a new law that could safeguard financial interests of individuals and corporations while supporting business in India.

The Insolvency and Bankruptcy Code came into existence in 2016 being a merger of several relative Acts. The same has been amended as well since its enforcement. Chapter 2 of Part 1 of the Bankruptcy and Insolvency Code, 2016 deals with the corporate insolvency resolution. However, Chapter 3 of Part 3 of the same IBC Code 2016 deals with insolvency resolution processes for individuals and partnership firms. For genuine debtors suffering due to financial losses beyond control, punishment for non-payment of personal loan can be evaded through insolvency resolution. Know more about the legal battle that starts with insolvency petition procedure in India. 

Who can File Insolvency Petition in India?

The insolvency proceedings in India can be initiated by the following:

• Corporate Debtor
• Financial Creditor
• Operational Creditor
• Individual Creditors
• Joint Creditors
• Insolvency Petition by Debtor himself/ herself

Can a Government Employee File an Insolvency Petition?

Although a government employee is not shielded from insolvency petition procedure in India. However, such an employee is liable to be dismissed from services once declared insolvent.

What is the Process of Insolvency in India?

The Insolvency and Bankruptcy Code, 2016 provides in detail the procedure to be followed in case of insolvency. Separate process has been explained for insolvency petition by debtor and creditors, and also for individuals, partnership firms and creditors respectively.

How do I apply for individual insolvency? - Also Applies to Partnership Firm

1.     Application to Initiate Insolvency Process

The creditor, joint creditors or the insolvency petition by debtor himself may be initiated. An application has to be filed with the adjudicating authority in this regard. The insolvency petition in India has to be accompanied with the following documents:

• Record of default/ debt.
• Proof of failure to pay debt within 14 days of notice period.
• Name of proposed resolution professional.

Debtors may consult with corporate lawyers in Kolkata in case jurisdiction for filing insolvency petition is Kolkata.

2.     Interim-Moratorium

The after effect of the insolvency application is that any kind of legal proceeding can not be invoked for any debt involved. It is a kind of stay on legal action until the current process is over.

3.     Appointment of Resolution Professional

Insolvency petition procedure in India is usually initiated by a resolution professional whose disciplinary records are checked by the Insolvency and Bankruptcy Board of India within 7 days. The same is again confirmed by the board within 7 days. In case the insolvency petition by debtor or creditor is filed personally, the board nominates a resolution professional itself. Appointment is officially done by the adjudicating authority.

4.     Submission of Report

The resolution professional is required to examine the application and submit a report within 10 days of his/ her appointment. The professional may also seek additional evidence or information if necessary which has to be furnished within 7 days. A report regarding acceptance or reflection of insolvency application has to be prepared by the resolution professional elaborating the reasons. In case the debtor is eligible for fresh start, conversion to fresh start application under Section 81 of IBC Code 2016 is done by the resolution professional.

5.     Admission or Rejection of Application

In accordance with the report submitted by the resolution professional, the adjudicating authority passes an order within 14 days for admission or rejection of the insolvency petition. In case the application is accepted, instructions for negotiation among creditors and debtors are issued in order to deduce a repayment plan.

6.     Commencement of Moratorium

After acceptance of the insolvency application, there will be a stay on any further legal proceedings by creditors against any of the debts involved. The debtor shall be restricted from alienating or disposing of any property

7.     Public Notice Seeking Creditor Claims

The adjudicating authority shall issue a public notice inviting claims from creditors within 21 days. Such notice includes the following information:

-         Order containing acceptance of insolvency application

-         Details of the resolution professional who registers the claims

-         This notice has to be published in an English and one local language newspaper.

-         The notice is affixed at the adjudicating authority’s office and website.

8.     Creditor Claim Registration

The creditors are required to register their claims with the resolution professional through convenient means containing their personal information and other particulars.

9.     Preparation of Creditor List

The resolution professional has to prepare a list of creditors within 30 days. The same has to be prepared based on the information provided in the insolvency application and the creditor registrations received.

10. Devise Repayment Plan

The debtor accompanied with the resolution professional shall devise a repayment plan restructuring the debtor’s debts and affairs. Justification for preparing a particular plan also needs to be made with the repayment plan. The resolution professional has to prepare a report regarding repayment plan and hand over the same to adjudicating authority within 21 days.

11. Meeting of Creditors

Once the repayment plan is approved, creditors will be notified 14 days before the conduct of a meeting for discussion over such a plan. During this meeting, creditors have a certain voting share as approved by the resolution professional and may approve, modify or reject the repayment plan. For any modifications suggested, debtor’s consent is necessary. The decisions made during creditor meeting have to be notified to the debtor, creditors and the adjudicating authority.

12. Order of Adjudicating Authority

The adjudicating authority approves or rejects the repayment plan finalized during the creditor meeting. Modifications may be suggested or directions for implementation of repayment plan may be issued by the adjudicating authority. In case the repayment plan is rejected by the authority, debtor or creditor may file a bankruptcy petition.

13. Implementation and Supervision of Repayment Plan

It is the duty of resolution professionals to oversee the implementation of repayment plans. If required, resolution professionals may also seek directions from the adjudicating authority for matters arising in between while implementing the repayment plan. After completing implementation, resolution professionals shall notify the people involved and the adjudicating authority through a final report containing all receipts.

14. Discharge Order by Adjudicating Authority

After everything is done with, the resolution professional may seek a discharge order from the adjudication authority in relation with all the debts involved in the matter.

Corporate Insolvency Petition in India

In case of companies/ corporate identities in India, insolvency petition procedure takes place as follows:

• Insolvency petitions may be initiated by a financial creditor, an operational creditor or the corporate debtor itself in case of a default. Details regarding corporate default can be understood with the help of corporations lawyer.
• The petition for insolvency resolution has to be handed over to the concerned adjudicating authority for corporate affairs.
• Relevant documents also need to be furnished along with the corporate insolvency petition in India.
• The adjudicating authority may examine the application and thereby accept or reject the insolvency petition procedure in India.
• A resolution professional may be proposed or otherwise directly nominated by the adjudicating authority.
• The insolvency resolution process should be completed within 180 days of application. However, the same may be extended through a request by the resolution professional towards the adjudicating authority explaining the reasons for such delay.
• Just like the individual insolvency petition procedure, corporate insolvency resolution also involves application of moratorium (stay over transactions including the debts involved).
• A public announcement is made and claims are sought from the concerned persons regarding corporate insolvency resolution.
• Based on the claims received, a committee of creditors has to be formed. While the insolvency resolution process goes one, the affairs of corporate debtor are taken care of by the resolution professional.
• A meeting is conducted with the creditors and each one is granted power to vote based on the share of debts owed towards them.
• The resolution professional can not take any action regarding financial affairs without seeking approval from the committee of creditors.
• A specific format suggested by the Insolvency and Bankruptcy Board of India has to be followed by the resolution professional to devise a repayment plan. The same has to be duly submitted with the adjudicating authority.
• Implementation of repayment plan initiates after the approval of adjudicating authority. However, such a repayment plan is subject to appeal on certain grounds^[1].

Creditor Rights in Insolvency Petition in India

A corporate creditor or someone who owes money to an individual or a partnership firm creditor enjoys the following rights during insolvency resolution:

• Right to attend the meeting
• Right to vote in the meeting
• Voting shares of creditors are decided by the Resolution Professional and as specified by the board
• Voting rights only to those creditors whose names are present in the list
• Give modification suggestions for repayment plan
• Have an authorized representative during meeting

Bankruptcy Proceedings Against the Debtors

Given below are the scenarios when insolvency resolution proceedings may interchange to bankruptcy:

• When the adjudication authority has passed an order against the insolvency petition by debtor stating it to be filed for the purpose of defrauding the creditors.
• When the adjudicating authority rejects the repayment plan during insolvency petition procedure in India.
• When the adjudicating authority finds lack of implementation of repayment plan for non-performing assets during insolvency process.

Insolvency Petition Disadvantages

• The corporate identity/ partnership firm/ person’s estate goes under liquidation.
• During the moratorium period, no assets can be sold or disposed of.
• Although there is a fixed period for the insolvency resolution process, it is usually delayed.
• In case insolvency proceedings go wrong, it may lead to bankruptcy proceedings as well.
• Financial affairs of the debtor are under control of another.
• In case a person is declared insolvent, he/ she is restricted from various contracts in the future.
• In case an insolvent person owes debts against another, such a creditor is at risk of losing the amount or having to settle with less.

^[1] Section 32 of Insolvency and Bankruptcy Code, 2016.