The Central Government has, vide notification dated 28.11.2016, notified “The Sick Industrial Companies (Special Provisions) Repeal Act, 2003” w.e.f. 01.12.2016. As a result, BIFR and AAIFR have been abolished and the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) is repealed. Pursuant to the same, all proceedings or appeals of whatever nature pending before BIFR/ AAIFR have abated.
Consequent to the above, the application of Sec. 22(1) of SICA, which granted protection to the Sick Industrial Companies against initiation of any coercive recovery measures or winding-up, etc. has ceased to be in force. However, any scheme of revival, which has already been sanctioned by the BIFR in the past and is under implementation, shall continue to be in force.
Further, the Central Govt. has, vide notification dated 30.11.2016, also notified the relevant Sections of the Insolvency and Bankruptcy Code, 2016 (IBC) relating to Insolvency Resolution for Corporate Persons w.e.f. 01.12.2016.
Under IBC, any company which has committed any default for an amount of Rs. One Lakh or more to its financial or operational creditors, may prefer an application for initiation of Corporate Insolvency Resolution Process. Even one or more financial or operational creditors of a company are also entitled to file an application before the NCLT for initiation of Corporate Insolvency Resolution Process in respect of their Corporate Debtor in case the default made by the Corporate Debtor is for an amount of Rs. One Lakh or more. The companies, whose references are abated under SICA, may also file an application under the provisions of IBC before the NCLT within 180 days from 01.12.2016 for initiation of Corporate Insolvency Resolution Process.
This enactment (IBC) paves the way for the complete overhaul of the Insolvency and Bankruptcy mechanism in India, which hitherto was governed primarily through the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 and the Companies Act (for Corporate entities) and other enactments like Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
Although the code is applicable to Companies, Limited Liability Partnerships (jointly defined as Corporate Persons (CP) under the Code) and to other Partnership Firms and Individuals, but presently we have restricted ourselves in dealing with some of the salient features of the Code and the procedures involved for Insolvency Resolution/ Liquidation of Corporate Persons and the same are set out below:
Adjudicating Authority (AA): NCLT/NCLAT for Companies and LLPs & DRTs/DRATs for Individuals and Partnership Firms.
Insolvency Regulator: The Code established an Insolvency Regulator called as The Insolvency and Bankruptcy Board of India (the Board) to regulate the Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (IUs) and powers to recommend the name of IRPs/ RPs for appointment in case the Adjudicating Authority makes a reference to the Board.
Insolvency Professionals (IP): A new class of professionals has been created under the Code, called as Insolvency Professionals to conduct the insolvency process and to manage the affairs of Corporate Debtor (CD) (the Corporate Peron i.e. the Distressed Borrower Company/LLP) during the Corporate Insolvency Resolution Process (CIRP).
Insolvency Professional Agencies (IPA): Insolvency professional agencies under the Code will develop professional standards, code of ethics and be first level regulator for IPs leading to development of a competitive industry for such professionals.
Information Utilities: (IUs): The code proposes to set up information utilities which would collect, collate, authenticate and disseminate financial information from companies/LLPs/Partnership Firms/individuals and financial and operational creditors of such entities.
Initiation of Corporate Insolvency Resolution Process (CIRP): Any creditor (whether financial or operational) of the Corporate Debtor (CD) may initiate CIRP by filing an application to Adjudicating Authority (NCLT) for commencing the process of resolution (restructuring/revival) of the Corporate Debtor. The application for CIRP shall be filed by the Financial Creditors (FC) u/s 7; by the Operational Creditor (OC) u/s 9 and/or by the CD u/s 10.
Process for Insolvency Resolution:
- Post the fling of application for initiation of CIRP the AA (NCLT) shall, within a period of 14 days, take a decision on the admission of the same or reject the said application. The CIRP shall be deemed to have commenced from date of admission of the said application and the entire process has to be completed with 180 days (extendable by 90 days) from the date of admission of CIRP application.
- Upon commencement of the CIRP the AA (NCLT) shall, by an order, declare a moratorium till the completion of CIRP (maximum 180-270 days) prohibiting initiation of any suit or continuation of any suit or proceeding or execution of any judgment or decree against the CD (section 14(1)(a)), disposal or alienation, in any manner by the CD of its assets or legal rights or beneficial interest in them (section 14(1)(b)), any action u/s 13(4) of SARFAESI by the secured lenders (section 14(1)(c)), recovery of any property which is in possession of the CD, whether or not owned by CD (section 14(1)(d). However the declaration of moratorium shall not result in suspension or termination of essential goods or services to the CD (Section 14(2)).
- Within 14 days of commencement of CIRP, the AA (NCLT) shall appoint an Interim resolution professional (IRP), as proposed in the application for initiation of CIRP and also cause a public announcement of the initiation of CIRP and call for submission of claims by the creditors of CD (section 13). From the date of appointment of IRP, the management of affairs of CD shall vest in the IRP and the powers of Board of Directors / partners of the CP shall stand suspended.
- The IRP shall collate all the claims received against CD and constitute a Committee of Creditors (CC) comprising all the Financial Creditors of the CD (irrespective of them being differently secured). As such, there is no concept of class of Creditors (1st Charge / 2nd Charge / unsecured) amongst the FCs. The CC shall within seven days of its constitution, with a super majority vote, resolve to appoint the Interim RP as the Resolution Professional (RP) or replace him with another RP to run the CIRP.
- The RP shall manage the affairs of the CD and also prepare an Information Memorandum (IM) about the CD in the prescribed manner for the formulation of resolution plans. Any person (called a Resolution Applicant) can file a Resolution Plan in response to the IM prepared and circulated by the RP. The Resolution Plans for the Corporate Debtor filed by various Resolution Applicants shall be examined by the RP and placed before the CC.
- A resolution plan, if approved by the CC (by 75% or more voting share of FC), shall be submitted by the RP to the AA (NCLT) for its approval. The AA (NCLT), after satisfying itself that the resolution plan as approved by CC is compliant with the requisites of section 30(4) of the Act (i.e. approved by 75% or more of the voting share of FC, provision for payment of dues to OC which is not lower than the amount which the OC would be eligible to get in the event of liquidation etc.) shall approve the plan (section 31(1)) or in case it does not satisfy the criteria then it may reject the said plan (section 31(2)).
The Liquidation Process
- In case the resolution plan is rejected by the AA (NCLT) for non compliance with the requisites of section 30(4) or no plan is received within the stipulated time frame of 180 days or 270 days, the AA (NCLT) may pass orders for liquidation of the CD and issue a public announcement to that effect. (Section 33)
- The AA may also direct liquidation of CD in the event the RP communicates to the AA that even during the pendency of the CIRP, the CC has decided to liquidate the company, or on determination by the AA (on an application filed by any person) that the provisions of resolution plan have been contravened by the CD.
- Upon passing of order of liquidation of CD by the AA the RP shall act as Liquidator and shall receive and collect claims of creditors, verify them and accordingly accept or reject the same and run the liquidation process in accordance with the provisions of the IBC.
Distribution of assets in case of liquidation: The Code also provides for priorities [waterfall] wherein the proceeds from the realization of assets of the CD are to be distributed to its creditors in case of liquidation. The priority as envisaged in the code is as follows:
- Insolvency Resolution Process costs and liquidation costs paid in full;
the following debts which shall rank equally between and among the following:
- Workmen dues for the period of twenty-four months preceding the liquidation commencement date; and
- Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
- wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
- financial debts owed to unsecured creditors;
the following dues shall rank equally between and among the following:
- 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;
- Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
- any remaining debts and dues;
- preference shareholders, if any; and
- equity shareholders or partners, as the case may be.
Cross – Border Insolvency: The code also covers certain provisions related to cases of Cross-Border Insolvency which envisage that:
- The Central Govt. may enter into an agreement with the government of any country outside India for enforcing the provisions of insolvency code
- Application of provision of insolvency code in relation to assets or property of corporate debtor or debtor, including personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.
As such, it may be noticed that the code is a comprehensive attempt to try to restructure/ revive a Company in a time bound manner of 180-270 days and if no such Corporate Restructuring Plan is approved or implemented within the stipulated time, then the Company would go into liquidation. In case of liquidation of a Corporate Debtor, the Personal Guarantor can file for and be declared as Bankrupt before the NCLT itself [Section 60(2)]. He will, however, remain disqualified from being appointed / elected to certain offices (as per Section 140 of IBC) and will have certain restrictions (as per Section 141 of IBC), unless and until the bankruptcy order against him is modified or recalled or he is discharged.