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Handling & Managing Litigations Relating To Insolvency Resolution Process
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Handling & Managing Litigations Relating To Insolvency Resolution Process

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    When a person or an entity is not able to meet its overdue debts to the creditors, investors or lenders it is termed as Insolvent and this particular state is called Insolvency. Insolvency can be settled by two ways which are as follows:

    Reworking on the plan of paying back to the creditors as well as investors.
    Trading the assets of the organization and reimbursing to the creditors or investors from the sale proceeds of the assets.

    It would be more accurate to understand the Insolvency Resolution Process stagewise in detail as laid out in the code.

    Initiation

    Not being able to pay back the amount to its creditors or investors or lenders either on time or for a very long time by any corporate or business entity, makes an organization insolvent and this state is called as insolvency. Under such circumstances, the application of insolvency is submitted to the NCLT (i.e. National Company Law Tribunal) by any one of the Operational Creditor or Financial Creditor or Corporate Debtor himself.

    If in case, it is the corporate debtor himself, the operational creditor has to send prior notice of demand for 10 days to the corporate debtor before the commencement of the insolvency resolution process.

    The bank, financial institution, any other lender or anyone providing a loan, credit facility or other financial assistance comes under the category of “Financial Creditors”

    Anyone who has been extended payment of credit during the course of business is known as an “Operational Creditor”. Both suppliers, as well as service providers, are covered under this provision.

    Insolvency Resolution Process by a Financial Creditor

    A financial creditor either jointly or all by himself shall take up the filing of the application before National Company Law Tribunal against the corporate debtor for insolvency proceedings.
    The evidence of default along with the name of the proposed insolvency professional that needs to be delegated shall be presented along with the application.

    Insolvency Resolution Process by an Operational Creditor

    An operational creditor will have to serve at least 10 days of prior notice to the corporate debtor asking him to pay back the dues before commencing with insolvency resolution process.
    In the event of the corporate debtor not being able to pay back the required amount in that particular time period and he/she also doesn’t bring any dispute or any arbitration proceeding pending against it to the notice of operational creditor then the operational creditor can simply file an application for insolvency resolution.

    Insolvency Resolution by the Corporate Debtor

    As per the provisions included in Chapter- II of the Code, where a corporate debtor has failed in the payment of dues to a financial or operational creditor, the corporate debtor or the financial or operational creditor (i.e.any applicant) can file the application for the commencement of the insolvency resolution process along with the financial documents of the business and other books of accounts. Moreover, as per Section 10 (3), (b) the corporate debtor shall also register the name of the suggested resolution professional along with the application.

    Document Required
    The Time Required For The Finalization Of The Insolvency Resolution Process

    As per Section 12 of the Insolvency and Bankruptcy Code, the insolvency process must have culminated within 180 days from the date of commencement in the NCLT (i.e. National Company Law Tribunal). The claims of the Creditors shall be frozen for a period of six months on certification of the application by National Company Law Tribunal.

    No legal claim shall be needed in opposition to the corporate debtor in any other forum or court until the liquidation process is begun or a resolution plan is made. Under all the above circumstances the application for commencement of insolvency resolution can either be admitted or rejected by NCLT within 14 days of the application before it.

    Additionally, as per section 16 of the Code NCLT shall assign the interim insolvency professional with the authorization of insolvency and bankruptcy board within 14 days of accepting the application.

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      Public announcement of Moratorium

      Before the admission of the insolvency resolution application, National Company Law Tribunal will make a public declaration for the compliance of claims by the creditors. Also, National Company Law Tribunal would appoint the interim resolution professional.

      Moratorium

      The moratorium will be stated by the National Company Law Tribunal for restricting the following:

      An institution of any suit or pending suit including execution of any judgment or decree against the corporate debtor.
      Encumbering, transferring, alienating or disposing of any property or right of beneficial interest.
      Any action to foreclose, recover or any security attraction created by the corporate debtor in regard to his property.
      Restoration of any property by the owner or lessor which is under the custody or control of the corporate debtor.
      Terminating the supply of goods and services to the corporate debtor.

      The date on which the resolution process is passed or on the date of liquidation the order of moratorium shall discontinue and would not be effective. Both the insolvency resolution professional as well as the Committee of creditors do not have any powers, granted by the Code, to abolish /withdraw or cancel any of the undecided actions or proceedings associated with the corporate debtor.

      There will be no influence on the matters which are pending before the imposition of moratorium except that during the moratorium period, such proceedings or actions will be stopped sine die. In the historical case of Canara Bank V.

      Deccan Chronical Holdings Ltd., the National Company Law Tribunal (Hyderabad) held that the power of the Hon’ble Supreme Court Article 32 of the Constitution of India. And Hon’ble High Courts under Article 226 of Constitution of India can’t be abridged by any provision of an Act or a Court. Thus, the moratorium under IBC prohibits these proceedings under the Constitution.  

      Role of Insolvency Professional

      An IRP (i.e. Interim resolution professional) is delegated by National Company Law Tribunal within 14 days from the commencement of the insolvency date and the term of his appointment shall not exceed thirty days from the date of appointment.
      Administering the affairs of the corporate Debtor as a going concern and both protecting as well as preserving the value of the property. Also taking control as well as custody of assets which the Corporate Debtor owns.
      Not just receiving but also collating the claims from creditors.
      Both the officers as well as managers of the Corporate Debtor shall report to the IRP (i.e. Interim resolution professional) and grant access to all the documents as well as records relevant to the Corporate Debtor. All accounts of Corporate Debtor as maintained by the financial institutions shall be supplied to the IRP. Also, IRP shall have an approach to the records as well as documents of the corporate debtor as available with government authorities, statutory auditors, accountants etc.
      IRP shall also have control over the electronic records of the corporate debtor.

      Formation of Creditors’ Committee

      An insolvency professional on the compliance of claims by all the creditors shall create a creditor’s committee and all the creditors who have put the claims shall be a part of creditors’ committee. As per Section 21 (2) of the Code, the creditors’ committee shall exist of only the financial creditors.

      A resolution plan can be put into action only if it has the authorization of 75% of the creditors with voting right in accordance with the voting share accredited. According to Section 24 (3) (c) of the Code, any operational creditors having accumulated dues of a minimum 10% of the total debt are only sent the notice of the meeting.

      It is important to note that the operational creditors cannot be the members of the committee and it is regardless of the size of their claim. The decision of the Creditors’ Committee in regard with the reason of incompetence of the corporate debtor to pay back the debts, whether it is a financial crisis or business shall pave the way of the committee to either go for a reorganization plan to the creditors or for liquidation process.

      Creditors committee is assumed to conduct their first meeting within 7 days of approval and may appoint a final insolvency resolution professional or can even give confirmation to the interim insolvency professional to be chosen as insolvency professional with the approval of 75% votes of the creditors committee.
      Both the directors as well as partners will not have voting rights but they shall show up at the meeting.
      Operational creditors shall have at least one agent attending the meeting on behalf of them but the agent shall NOT have voting right.

      In order to authorize the resolution applicant to form a resolution plan, the resolution professional shall arrange for an information memorandum. Resolution professional, if in case satisfied by the restructuring of repayment plan submitted by the resolution applicant, shall present the plan to the Creditors’ committee for confirmation.

      The plan will be approved only if 75% of the votes of the creditors’ committee are in favor of this decision. Once the approval is attained then NCLT will order the accomplishment of the restructuring plan in a prescribed manner.

      The moratorium shall discontinue having any consequences after the authorization by NCLT and the resolution professional will forward both the documents as well as the records to the board of directors for conducting the insolvency resolution process adequately.

       

      Alternately Call our Legal Expert Now For Free Consultation at 09599653306

      Frequently Asked Questions on Handling & Managing Litigations Relating To Insolvency Resolution Process

      With both the owners as well as bidders of companies that failed on debt repayments objecting of arbitrary use as well as interpretations of the Insolvency and Bankruptcy Code (IBC) by insolvency resolution professionals (IRPs) and lenders, additional cases pertaining to non-performing assets (NPAs) resolution are likely to head to the court.   Example: As the resolution process of Videocon Industries, Binani Cement and Jaypee is in court, the next round of litigation is anticipated in the bidding process of Essar Steel and Bhushan Power & Steel.   “Most of these cases will be appealed in the Supreme Court as the understanding of the code is distinctive in most cases.”

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