Initiating Corporate Insolvency: A Step-by-Step Guide

Introduction:

The origin and evolution of Indian insolvency law stem from the need to provide a systematic framework for resolving debt-related issues between debtors and creditors. The Insolvency and Bankruptcy Code, 2016 (IBC) is the result of a long historical and legislative journey that involved significant recommendations and developments.

Who is a financial creditor and operational creditor?

The Code differentiates two categories of creditors: financial creditors, where the liability to the debtor arises from a solely financial transaction, and operational creditors, where the liability to the debtor arises in the form of future payments in exchange for goods or services already delivered. In cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity, the creditor will be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt is more than half the full liability it has with the debtor.

Who is a corporate applicant under the Insolvency and Bankruptcy Code?

A corporate applicant refers to individuals or entities eligible to initiate the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. This includes the corporate debtor itself, which can voluntarily commence CIRP if it is unable to pay its debts. Additionally, a member or partner of the corporate debtor may file the application, provided they are duly authorized to act on its behalf. Key managerial personnel such as the CEO, CFO, managing director, or any other individual responsible for the corporate debtor's management or control are also eligible. Furthermore, any person authorized by the corporate debtor through a board or partners’ resolution can initiate the process. These provisions ensure that CIRP can be triggered by individuals closely connected to or authorized by the corporate debtor.

1. Procedure for Initiating corporate insolvency resolution by Financial Creditors (Section 7)

Financial creditors can initiate the corporate insolvency resolution process (CIRP) against a corporate debtor either individually or jointly with other financial creditors. For real estate projects, the initiation requires either a minimum of 100 allottees or 10% of the total allottees under the same project, whichever is lower. The application must include the prescribed fee, evidence of default, the proposed name for an interim resolution professional, and other information specified by the board. Upon receiving the application, the Adjudicating Authority must verify the default within 14 days using records from information utilities or other evidence. Based on this verification, the Authority may admit or reject the application and is required to communicate the decision to all parties within 7 days. If defects are found in the application, the Authority allows a 7-day window for rectification.

2. Duties of Operational Creditors (Section 8)

When a default occurs, operational creditors are required to deliver a demand notice to the corporate debtor, accompanied by an invoice copy for the unpaid operational debt. Following this, the operational creditor must wait for the corporate debtor's response. Within 10 days of receiving the demand notice, the corporate debtor must notify the creditor of any existing dispute or pending legal proceedings concerning the debt or provide proof of payment, such as a bank transfer record or an encashed cheque, if the debt has already been settled.

3. Procedure for Initiating corporate insolvency resolution by Operational Creditors (Section 9)

To initiate corporate insolvency resolution under Section 9, an operational creditor may proceed after the expiration of a 10-day notice period if no payment or dispute notice is received from the corporate debtor. The application must include essential documents such as a copy of the invoice or demand notice, an affidavit confirming the absence of a dispute notice, a bank certificate verifying non-payment, information utility records (if available), other relevant proof of non-payment, and details of the proposed interim resolution professional. Upon receipt of the application, the Adjudicating Authority is required to review it within 14 days, verifying its completeness, confirming payment status, ensuring delivery of the demand notice, and checking the existence of any disputes. If defects are identified, the applicant is given seven days to rectify them before the process proceeds further.

4. procedure for Initiating corporate insolvency resolution by Corporate Applicant (Section 10)

A corporate debtor can self-initiate a corporate insolvency resolution process under Section 10 of the Insolvency and Bankruptcy Code by submitting a prescribed application along with the required fee, details of its books of accounts, and the name of a proposed interim resolution professional. The initiation must be supported by a special resolution from shareholders, approved by at least 75%, or a resolution from partners in the case of a partnership firm. Upon receiving the application, the Adjudicating Authority is required to verify its completeness, ensure the eligibility of the proposed interim resolution professional, and process the application within 14 days. If any defects are found, the applicant is provided an opportunity to rectify them within a stipulated timeframe.

5. Persons Not Entitled to Apply (Section 11)

The following cannot initiate proceedings:

• Debtors in pre-packaged insolvency

• Creditors of pre-packaged insolvency debtors

• Debtors who completed process in last 12 months

• Debtors with approved Chapter III-A resolution

• Resolution plan violators

• Entities under liquidation

6. Application Disposal (Section 11A)

• This section Prevents multiple applications under different sections

• Bars simultaneous applications under Section 54C and Sections 7/9/10

7.Procedure for Application Withdrawal (Section 12A) made under Section 7/9/10.

Requirements:

• 90% voting share approval from creditors committee

• Must follow specified procedures

• Requires Adjudicating Authority approval

8. Pre-packaged Insolvency Process Eligibility

Limited to Micro enterprises, small enterprises and medium enterprises (As defined under MSME Development Act, 2006)

9. Pre-packaged Insolvency Process Application (Section 54C)

The process for filing a Pre-packaged Insolvency Application under Section 54C involves several key requirements and steps. Firstly, the applicant must provide a declaration, obtain a special resolution from the company’s board, and secure approval from the financial creditors. The consent of a proposed insolvency professional to oversee the process is also mandatory. Additionally, the application must include declarations of past transactions, comprehensive information from the company's books of accounts, and other specified documents. Upon submission, the application undergoes a review within 14 days, during which the applicant is given an opportunity to rectify any defects. Once the application is admitted, the pre-packaged insolvency process officially commences from the date of admission.

Conclusion:

The Insolvency and Bankruptcy Code of 2016 provides a comprehensive framework for resolving corporate debt in India. By establishing clear procedures for financial and operational creditors, the Code introduces a systematic approach to corporate insolvency. It offers multiple resolution pathways while implementing strict eligibility criteria, balancing the interests of creditors and debtors. The legislation reflects a significant advancement in addressing financial distress, promoting transparency and efficiency in corporate debt resolution.