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The 5 steps to liquidation or resolution under India’s new insolvency law

The Insolvency and Bankruptcy Code, 2016 (“IBC”), as I’ve highlighted previously, combines in a single legislation, the processes for resolution or liquidation of corporate persons. Let’s look the various steps involved.

Step 1 – Application to the NCLT

A financial or operational creditor of a company, or the company itself, can apply to the National Company Law Tribunal (“NCLT”) for an order to admit that company (or “Corporate Debtor” as the IBC calls it) into the corporate insolvency resolution process (“CIRP”). The creditor has to show that there has been a default in the payment of its debt exceeding 1 lakh rupees. The NCLT has to pass an order either admitting or denying the application within 14 days (although the National Company Law Appellate Tribunal (“NCLAT”) in J.K. Jute Mills Co. v. M/s Surendra Trading Co. has now held that this provision is merely directory).

A financial creditor and an operational creditor need to meet slightly different evidentiary thresholds when making their applications before the NCLT. A financial creditor has to show the record of the default. The IBC has created a new class of record keepers called “Information Utilities” but since these have not yet been set up, the records maintained in statements of accounts, bankers’ book certificates, and credit information bureaus are currently being used.

In Innoventive Industries Limited v ICICI Bank Limited, one of the earliest cases under the IBC, the NCLAT clarified that the scope of the NCLT’s enquiry in such an application was limited to the question of whether or not a default existed, and that it should not enquire further into the circumstances of the default, or whether it was appropriate for the corporate debtor to be admitted into CIRP. The Supreme Court recently endorsed this position.

On the other hand, an operational creditor (more on the distinction between financial and operational creditors in a later article) needs to first make a demand for his unpaid debt and it is open to the corporate debtor to defend the claim on the basis that there is an ongoing dispute.

Step 2 – CRIP starts; Interim Resolution Professional takes over; moratorium sets in

Once a corporate debtor is admitted into the CIRP, its board of directors is suspended and its management is placed under an independent “interim resolution professional”. From this point on and until the end of the CIRP, the erstwhile management ceases to have any control over the affairs of the company.

Simultaneously, a moratorium takes effect which prohibits: (a) the continuation or initiation of any legal proceedings against the corporate debtor, (b) the transfer of its assets, (c) the enforcement of any security interest, (d) the recovery of any property from it by an owner or lessor, and (e) the suspension or termination of the supply of essential goods and services to it. The moratorium lasts till the corporate debtor is in CIRP.

It is important to note here that the moratorium does not extend to key business contracts entered into by the corporate debtor. Many contracts stipulate insolvency, bankruptcy, and analogous proceedings as events that trigger termination and the mere admission of the corporate debtor into CIRP could give rise to the termination of its key business contracts.

Step 3 – Verification and classification of claims, appointment of the resolution professional: The interim resolution professional will then invite and verify claims made by the corporate debtor’s creditors, classify them, and within 30 days of the admission into CIRP, form the Committee of Creditors (“COC”), comprising all the financial creditors of the corporate debtor.

Step 4 – Appointment of the resolution professional

The COC then appoints an independent person to function as the “resolution professional” for the remainder of the CIRP term. The resolution professional may be the same person as the interim resolution professional, or someone else, depending on what the COC wants.

Step 5 – Approval of the “resolution plan” or liquidation

Within 180 days from the start of the CIRP, a resolution plan for the revival of the company needs to be approved by creditors holding 75% of the financial debt. The NCLT can extend this by another 90 days.

Any person, including the erstwhile management, the creditors, or a third party can propose such a plan. As it is the responsibility of the resolution professional to verify that the plan meets the criteria set out in the IBC, it would seem that the Resolution Professional cannot propose this plan, although this is not expressly prohibited under the IBC. I’ll discuss more about the resolution plan in a later article.

If a plan is approved within this period and is sanctioned by the NCLT, it is adopted and becomes binding on all “stakeholders” involved in the CIRP. The term “stakeholders” has not been defined and while the IBC expressly mentions that the resolution plan will bind the creditors, employees, members, and guarantors, it is currently not clear what other stakeholders a resolution plan can bind.

And if no resolution plan is approved in this period, the NCLT is required to order the liquidation of the corporate debtor. If an order of liquidation is passed, a liquidator will be appointed by the COC to sell the assets of the corporate debtor and distribute the assets among the stakeholders. The distribution will be made in accordance with a “priority waterfall” set out in Section 53 of the IBC. This will be addressed in a later article.

Time is of the essence, limited judicial role

The IBC, by providing for various time limits in the process, has introduces a “time” element that was missing from previous legislations. Significantly, liquidation has to be ordered compulsorily if a resolution is not worked out within 180 days (or the extended 270 days). The expectation is that stakeholders will be forced to work together in a constructive manner to avoid liquidation.

Another significant deviation from the previous regime is that financial creditors drive this process, not the courts. Ultimately, any resolution plan has to be approved by the COC members holding 75% of the financial debt. The NCLT needs to look only at some parameters set out in the IBC while approving the resolution plan. This is quite a contrast to the earlier winding up regime, where a court would determine whether a company should be admitted into winding up or not.

 

Uday Khare is a Partner at Cyril Amarchand Mangaldas.

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