Corporate Insolvency

An organization becomes insolvent when it is unable to pay its debts to its creditors. The term insolvency is also known as winding up or liquidation. Over the years, different jurisdictions have brought out the meaning of corporate insolvency. In India, the term corporate insolvency has been amended from time to time. A lender or creditor would require corporate insolvency services to reduce procedural constraints in the process of insolvency.

OUR SERVICE inclusions:

  • Advice on the procedure for corporate insolvency services.
  • Regulatory advice on the Insolvency and Bankruptcy Code, 2016 (IBC 2016).
  • Restructuring Advice.
  • Advice on the different types of insolvency.

What is Corporate Insolvency?

Corporate insolvency is understood as the company’s inability to pay its debts to the suppliers and creditors. There are different forms of creditors for a company. Some of these creditors include banks, financial institutions, NBFCs. Apart from these types of creditors, there are also suppliers of raw materials and capital goods. Corporate insolvency is defined as the process where the assets are categorized, collected and realized by the company’s creditors. In India, the term corporate insolvency or winding up of a company has been given under the companies’ act 1956. The definition of insolvency has also been included in the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016 (IBC 2016).

Overview of Corporate Insolvency Industry in India

After the companies act, 1956, one of the first legislation which was brought out was the Sick Industrial Companies Act. However, there were problems in this as it did not address all types of companies. Many authorities came up with different laws related to insolvency proceedings; however, it did not solve the problems with the recovery of debts. Even the Reserve Bank of India (RBI) brought out a resolution plan where creditors and insolvent companies agreed to negotiate terms of the resolution. However, this wasn’t feasible for many lenders.

This paved the way to the Insolvency and Bankruptcy Code, 2016 (IBC 2016), which brought considerable changes to how the insolvency regime works in India. The number of distressed assets and NPA’s has reduced considerably after the introduction of the IBC, 2016. The amount of time for repayment of debt has been reduced to 180 days, which can be extended to a maximum of 270 days.  Thus the introduction of the IBC 2016 brought out revolutionary changes to the way in which insolvency proceedings happen within a company. 

What are the key features of the IBC under Corporate Insolvency?

  • IBC reduced the time limit for repayment of loans to 180 days. This period can be extended to 270 days with the consent of the creditors.
  • The introduction of the IBC increased the business dealings of foreign investors in India.
  • IBC applies to landlords and tenants also. Hence tenants can use this law to bring landlords to justice for not completing any form of construction work (for non-payment of dues).
  • All corporate insolvency and bankruptcy cases are resolved within a particular period.
  • Under the IBC, creditors are divided into financial creditors and operational creditors.
  • Before the IBC, creditors had a right over the assets of corporate debtors. After the introduction of the IBC, insolvency experts are hired to control the company’s operations.
  • Under the IBC, the National Company Law Tribunal (NCLT) has the authority to handle all cases of corporate insolvency and bankruptcy.

As a result of the IBC, creditors, and lenders get the majority of the number of votes which is about 66%. 

Types of Corporate Insolvency Services

  • Administration

The administration is a process of insolvency, where the company is unable to pay its suppliers and creditors. In an administration process, the company does not have any assets. The directors and lenders of the company have to appoint insolvency practitioners to manage the business. Insolvency experts have the authority to run the business in a manner that is not prejudicial to the interests of the lenders and creditors.

  • Company Voluntary Liquidation

Company voluntary liquidation is also known as liquidation with the shareholders’ prior consent. In Voluntary liquidation, the shareholders’ decision is taken into consideration that the company’s operation is no longer required. In this process, a resolution is taken by the shareholders in the general meeting to not run the company. Once the shareholders of the company take this decision, the company winds up the business. This decision is normally not taken by the court.

  • Creditors Voluntary Liquidation (CVL)

 Creditors’ voluntary liquidation is also known as CVL. In a CVL, the directors will decide whether to commence the liquidation proceedings in the company. Once this decision is taken, a notice is given to the shareholders and creditors of the company regarding the same. Once this is considered, an insolvency expert will be recruited to produce the company’s statement of affairs. Here majority consent is required from the shareholders to carry out the procedure.

  • Compulsory Liquidation

Compulsory liquidation is a process in which the company’s assets are realized and then distributed to the company’s creditors. In this form of order, the consent of the creditors or shareholders is not considered, as a petition is put forth to the court to carry out this liquidation process. The reason for the company being insolvent is put forth by the court. However, one of the main reasons for compulsory liquidation is the company being insolvent.

Regulatory Authority/ Body for Corporate Insolvency 

The Government of India has brought out corporate insolvency laws since 1985. However, due to the changing needs of lenders, the law has been evolving. The following authorities are involved in corporate insolvency procedure:

  • NCLT- National Company Law Tribunal.
  • NCLAT- National Company Law Appellate Tribunal.
  • IBBI- Insolvency and Bankruptcy Board of India.
  • MCA- Ministry of Corporate Affairs.

The following laws and regulations apply to insolvency practices in India:

  • Companies Act 2013 and previous Company Law 1956.
  • Insolvency and Bankruptcy Code, 2016.

Procedure for Corporate Insolvency 

Step 1

Under the IBC, 2016, there are two types of creditors.

  • Financial Creditors

These creditors can be secured creditors as well as unsecured creditors. This can be an individual to whom a financial debt is owed. This debt can be transferred to another individual also.

  • Operational Creditors

Operational creditors are creditors, including suppliers of raw materials, products for manufacturing essentials, and capital goods. Materials supplied for a corporate debtor can be considered as an operational creditor.

Either a financial creditor or an operational creditor can apply to the NCLT for insolvency proceedings.

Step 2:

Once an application to the NCLT is made, a notice called the demand notice must be issued by the operational creditor to the debtor. This notice is present in Form 3- Rule 5 of the IBC. The following documents and methods have to be used while submitting the demand notice:

  • Copy of the invoices which state that the debtor owes the amount.
  • The notice must be sent to the registered office.
  • Notice can be sent either in person or through speed post or electronic mail.

Once this is carried out, the debtor has to immediately respond within ten days that that amount of debt is paid (with proof of the same). The debtor can also contest the amount of debt.

Step 3:

After completion of 10 working days, if the debt is not paid or the contest is not carried out by the debtor, then the operational creditor has the right to make an application before the NCLT stating the grounds of non-payment. Along with this, the creditor must also initiate the resolution process of the company.  In the resolution process, insolvency experts would be hired to assess the corporate debtor’s ability to repay the debt. If this process is possible, then all the company assets are realized, and the debt is paid off.

The following documents have to be submitted along with this:

  • Copy of the demand form or notice- Form 3.
  • Bank Statements to show that there is no remaining payment to be made by the creditor to the debtor.
  • Documents that are filed along with the application.
  • Written consent.
  • Document related to the appointment of Insolvency Expert (Form-2).
  • Proof that the application fee has been paid.
  • Qualification of the resolution expert that the individual is qualified to carry out the corporate insolvency procedure.
  • Accompanied documents which have to be submitted to the NCLT through an electronic format.

The documents, along with the above application, can be sent through speed post or in-person 

Step 4:

After going through the application, the NCLT is required to pass an order within 14 days. The order has to state whether the application is allowed or denied.

  • If the application is allowed, then a moratorium period is allowed. During the moratorium period, the company is not allowed to carry out any form of operations. During this period, an interim insolvency expert must also be appointed. This is till the committees of creditors are appointed. The committee of creditors will take the position of the board of directors of the company.
  • An announcement is made regarding the insolvency resolution. Through this announcement, other creditors are informed about the resolution.
  • Once the creditors’ committees are formed, they have to manage the business assets and monitor the business’s day-to-day activities. 

Step 5:

Once the Committee of Creditors is formed a resolution professional must be appointed. This appointment must happen within seven days. Either the interim resolution professional will become a permanent member in handling the operations of the debtor. Apart from this, the company can also appoint another resolution professional to conduct the resolution process and handle the operations of the debtor.

Step 6:

Once the resolution professional is appointed, the priority of debts that the debtor has to pay to the creditors has to be set out. The priority of debts will depend on the ranking of the creditors. Apart from this, the professional will also consider making the resolution plan.

Step 7:

After this, the plan must be approved by the creditor’s committee. Approval of the majority is required from the committee of the creditors, which is 66%.

Step 8:

Depending on the Committee of Creditors, the decision can either be approved or rejected. The decision will be binding on all the concerned parties.

Step 9:

Liquidation would take place if the following occur:

  • If the parties have not decided on the corporate insolvency resolution plan.
  • If the NCLT does not approve the plan
  • If the creditors require the company to carry out the process of liquidation.
  • If the creditor breaches any provisions of the NCLT.

Step 10:

If the company decides to go into liquidation, an official liquidator is appointed to manage the company. A liquidator’s main role is to sort all the company’s assets and distribute them to the creditors. There are both secured as well as unsecured creditors in the liquidation process. The dues of secured creditors can be realized fully. Depending on the priority, the realizations of debts are carried out by unsecured creditors. 

Step 11:

The order of priority will happen only after the payments are made to the experts. The following order of priority has to be looked into the corporate insolvency procedure:

  • For 24 months period- workman dues.
  • Secured creditor debts- Which has to owed after the security is relinquished.
  • Any unpaid wages of employees- 12 months.
  • Unsecured Creditors- Financial and other forms of debts.
  • Equal ranking of the following (Pari Passu)-a)
  1. a) Central or State government debts or any form of consolidated debt of the government.
  2. b) Secured creditors.
  • Preference shareholders dues and sum owned.
  • Equity shareholder sum owned.

Step 12:

Once the debts are paid, the order for the corporate debtor’s dissolution is carried out.

Advantage- Corporate Insolvency

  • KESHAV BANSAL & CO. is a recognized insolvency expert handling different types of insolvency exercises.
  • We have multifaceted teams of professionals comprising Chartered Accountants lawyers and company secretaries.

Frequently Asked Questions

What is the meaning of Corporate Insolvency Resolution?

Corporate Insolvency resolution is a process in which an insolvency expert is appointed to analyze the company. In the Corporate resolution process, the following is considered:

  • Whether the company can pay the debts; or
  • To liquidate the company.

How is insolvency carried out?

The financial creditor or the operational creditor must prove that the financial debtor has not paid the debt. Along with this, supporting evidence must be provided by the creditor.The financial creditor or operational creditor must ask the debtor to pay. If this is not carried out within a certain period, then the NCLT must be approached.

What are the different types of creditors under the IBC 2016?

Under the IBC, there are two types of creditors:

  • Operational Creditors

Good suppliers, raw materials, and other goods suppliers come under the definition.

  • Financial Creditors

Banks and other financial institutions come under the meaning of financial creditors.

What is the time limit for resolution under the IBC?

The period of resolution under the IBC has been reduced to a maximum of 180 days. This period is extended to 270 days in exceptional circumstances. However, prior consent is required from the authority.

Who are allowed to carry out the corporate insolvency resolution process against the debtor?

Under section 6 of the IBC, only the following can initiate a debt proceeding against a corporate debtor:

  • Financial Creditor;
  • Corporate; and
  • Operational Creditor.

Can a trade union be considered an operational creditor?

Yes, a trade union can be considered an operational creditor for the IBC. Members of the trade union will constitute employees who are working for a particular company. They may also be considered as suppliers who regularly supply goods to the company. Though there will be separate claims from different individuals. However, one individual in the trade union applies on behalf of all the members by taking consent and authority to represent the whole union.

Can rent recovery come under the provisions of the IBC?

Yes, rent recovery claims can come under the provisions of the IBC. For this purpose, the debtor will be considered the tenant, and the creditor will be the landlord.