Author: Manya Jaitley
Even in the process of insolvency resolution or liquidation, the company needs its directors and promoters. Once the insolvency resolution process begins, the power of the board of directors is the responsibility of the appointed bankruptcy resolution expert. The support and cooperation of bankruptcy and settlement experts, the participation of creditors in meetings, and the submission of documents and affidavits are the responsibility of directors and sponsors.
IBC which came into power in 2016 aims at ushering the process of insolvency is strict on timing and bounds the Adjudicatory Authority to complete the process within 180 days and further extension of only 90 days is granted. Both companies and individuals can initiate insolvency resolution process under IBC wherein if any wrongful or fraudulent trading is done to defraud the corporate debtor then its director, promoter or any other person involved will be held liable. Also, directors need to furnish their declarations and affidavit for initiating the process of liquidation. Even when the powers of directors and promoters stand transferred to Insolvency Resolution Professional they still owe a duty towards their company.
ENACTING THE CODE
The Insolvency and Bankruptcy Code (hereinafter referred to as IBC) came into power in the 67th year i.e. on 28th May 2016 in the Republic of India.
Previously, there was no bankruptcy law or comprehensive law dealing with bankruptcy. The Sick Industrial Companies (Special Provisions) Act of 1985, the Bank and Financial Institutions Debt Recovery Act of 1993, the securitization and Reconstruction of financial assets and the implementation of security interests (2002) and the Company Law (2013) had provisions of insolvency and bankruptcy for companies. These regulations also provide conditions for the establishment of the Industrial Finance and Reconstruction Commission (BIFR), the Debt Recovery Tribunal (DRT) and the National Company Law Tribunal (NCLT).
Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 dealt with insolvency and bankruptcy of an individual.
Ever since India welcomed the policy of liberalization, privatization and globalization, a need of the hour was felt for resolution of insolvency and bankruptcy procedures under one consolidated law. ‘Statement of Objects and Reasons’ states IBC caters to the same.
The constitutional validity of IBC has been upheld in which it was held that: The Insolvency Code is an enactment which manages financial issues and, in the broader sense, it manages the economy of the nation overall.it has been seen that legislation has failed in trials leading to repetitive errors which lead to the enactment of code. However, in numerous matters the Constitutional validity of the various provisions of the Insolvency and Bankruptcy Code, 2016 have been challenged. The experiment contained in the Code decided by the provisions mentioned in the code and not supposed by crudities and disparities that have been brought up by the petitioner. It is a serious obligation to continue to try things, and deprivation of judicial power has serious consequences for the country. In addition, please note that the function of the code is supervised by a special committee established by the central government on its behalf. In the short term when the Code entered into force, the Code itself and its subordinate laws were revised. This process is an ongoing process involving all stakeholders, including the petitioners.
APPLICATION OF IBC
The provision of IBC applies to the following:
- The company which are incorporated under the Companies Act, 2013,
- Any entity or body incorporated under any law for the time being in force,
- Partnership or proprietorship firm,
INITIATING CORPORATE INSOLVENCY RESOLUTION PROCESS
Before beginning with the procedure involved in the insolvency process, it is important to know as to who can initiate an insolvency process. A financial creditor, operational creditor or the corporate debtor itself can initiate the insolvency process.
Financial Creditor: Defined in Sec. 5(7) of IBC as a person to who a financial debt is owed.
The interpretation of the term financial creditor has been done by NCLTin which the NCLAT decided to consider buyer of land as “financial creditors” under the “Assured return” plan for IBC considerations. Therefore they are eligible for the initiation of insolvency process against manufacture in case of such “guaranteed/assured return” payments and non-delivery. NCLAT also decided that the “debt” in this case would be allocated taking into account the “time value of money” which is essentially required to be fulfilled for an arrangement to Eligible as a ‘financial Debt’ and “financial creditor” for the lender under the IBC plan
Financial Debt: As defined in Sec. 5(8) means a debt which is given against consideration for the time value of money.
Operational Creditor: As defined in Sec. 5(20) means a person to whom an operational debt is owed.
Operational Debt: As defined in Sec. 5(21) means a claim in respect of the provision of goods or services.]
- Financial Creditor initiating corporate insolvency resolution process:
Under sec 7, a financial creditor can either individually or jointly with other financial creditors initiate an insolvency resolution process against the corporate debtor. Any other person on behalf of the financial creditor can make an application to the Adjudicating Authority (hereinafter referred to as Authority) in case a default has occurred.
While making an application to the Authority the following shall be attached along with:
- Record of the default,
- Name of the proposed resolution professional who will act as an interim resolution professional, and
- Any other relevant information which shall be furnished along with.
- Once an application is made to the authority, it shall within 14 days of receipt of the application have to decide (from the record furnished) whether there exist any default.
However, If the Authority is satisfied with the application made above by the financial creditor, it may admit the application or otherwise reject the application as it deemed fit.
- Operational Creditor initiating corporate insolvency resolution process:
On the occurrence of default the operational creditor, unlike financial creditor, has to deliver a demand notice of unpaid operational debt along with an invoice of the amount involved in default.
The corporate debtor shall dispute it within 10 days of receipt of demand notice by providing them with the following:
- Record of any pendency of the suit or arbitrational proceeding or an invoice related to any such issue.
- Payment of a debt in regards to which the notice was received, either by sending a record of electronic transfer or by a record of encashing of cheque by operational creditor.
What if the demand notice went unanswered even after 10 days i.e. neither is it disputed nor any payment was made?
Sec. 9 of the IBC states that if the demand notice is neither disputed nor any payment is made, then the operational creditor may initiate the insolvency proceeding before the Authority.
While applying to the Authority, the following needs to be accompanied with it:
- Copy of demand notice and its delivery receipt;
- An affidavit stating that the demand notice was unanswered by the operational debtor;
- A copy of certificate confirming the unpaid dues of operational creditor issued by the financial institution maintaining their account; or
- Copy of any such record with information utility confirming non-payment of operational dues by an operational debtor or any other proof.
As per Sec. 9(4), the operation creditor initiating insolvency proceedings may also propose an interim resolution professional (hereinafter referred to as IRP).
The Authority shall within 14 days of the receipt of the application admit it on the following grounds:
- Application is complete, invoices and demand notice is attached;
- The operational creditor has neither made payment nor the notice of dispute being sent by him;
- There must be no disciplinary proceeding pending against him.
If any of the above grounds seems to be not fulfilled, the application may be rejected.
- Corporate insolvency resolution process initiated by the corporate debtor itself:
An application can be filled by the corporate applicant before the Authority for initiating insolvency resolution process if a default has been occurred by the corporate debtor.
The application must furnish the following with it:
- It must include information regarding books of account or any other financials;
- It must include the name of Proposed Resolution professional for appointing as IRP; and
- Shareholders must pass a Special resolution with the voting of 3/4th of the total number of partners of the corporate debtor.
PERSONS NOT ENTITLED TO MAKE APPLICATION
Section 11 of the act stipulates that the following persons are not eligible to make an application to the initiated corporate insolvency resolution process, namely:
- A corporate debtor who are going a corporate insolvency resolution process; or
- A corporate debtor who has completed corporate insolvency resolution process twelve months before the date of making of the application;
- A corporate debtor or a financial creditor who violates any terms of the approved settlement plan; or
- The debtor of the company for which a liquidation order has been issued
TIME-PERIOD FOR COMPLETION OF INSOLVENCY PROCEEDINGS
Sec. 12 of IBC makes it mandatory to complete the insolvency proceedings in 180 days from the date of admission of application.
A further maximum extension of the period of 90 days can be granted at the application made to the Authority by the IRP.
DECLARATION OF MORATORIUM AND PUBLIC ANNOUNCEMENT
Once the application is admitted, the adjudicating authority may by order:
- Declare a moratorium. Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims.
- Appoint an interim resolution professional.
Moratorium (Section 14)-
The moratorium may be declared by the Adjudicating Authority for prohibiting all of the following,:-
- There must be no suits instituted or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, the corporate debtor must be free from any institution of suits or continuation of pending suits or proceedings against him. The corporate debtor must also be free from the execution of the judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
- The corporate debtor must not transfer, encumber, alien or dispose of any of its assets or any legal right or beneficial interest.
- The corporate debtor must not take any action to foreclosure, recover or enforce any security interest created by him.
- There must be the recovery of any property by an owner or lessor where such property is occupied.
APPOINTMENT OF INTERIM RESOLUTION PROFESSIONAL
U/s 88(1) of IBC, The Insolvency and Bankruptcy Board of India is required to appoint an insolvency professional within 14 days from the commencement of insolvency resolution process.
The proposed insolvency professional is appointed once the proposal is made by a financial creditor or corporate debtor
Where no proposal as to the appointment of IRP is made, the Authority may make a reference to the Board for recommending the resolution professional. The Board is required to recommend within 10 days the name of an insolvency professional to the adjudicating authority.
ROLE OF DIRECTORS AFTER THE APPOINTMENT OF INTERIM RESOLUTION PROFESSIONAL
- The powers of the board of directors or partners will be suspended from the date of appointment of IRP and such powers will stand transferred to the IRP appointed in accordance with Sec. 17(1)(b) of IBC
- The IRP is required to conduct meetings of the committee of creditors and the Notice of such meeting is required to be sent to the suspended Board of Directors or partners of the corporate person in accordance with Sec. 24(3)(b).
- The meeting is required to attend by Directors, partners and one representative of operational creditors. Such a meeting will not be considered as invalid, in case of absence of directors, partners, or operational creditors.
DUTIES OF INTERIM RESOLUTION PROFESSIONAL
The Interim Resolution Professional is required to accomplish the following duties:
- Collect all information relating to the assets;
- Receive and collate all the claims submitted by creditors to him; and
- Constitute a committee of creditors.
Following sec 29 of the IBC, it is required to prepare an information memorandum based on which a resolution plan will be prepared by the Resolution Applicant. The resolution plan will be submitted for approval before the committee of creditors. The committee may consider the feasibility, viability and any other requirement and may approve the resolution by a vote of not less than 60% of financial creditors,
Once the approval is made from the committee of creditors, the resolution plan will be submitted before the Authority, which will then check whether the resolution plan submitted to meet the requirements stated u/s 30(2) of IBC. If the Authority doesn’t approve of the resolution plan, then an appeal may be filed u/s 61(3) of IBC.
When the Authority gives a green go the resolution plan submitted, the process of liquidation begins.
DUTIES OF A PROMOTER DURING INSOLVENCY RESOLUTION PROCESS
It is one of the duties of the corporate debtor as per sec 19 that its staff, promoter and any other person should co-operate and provide all the assistance as required by the insolvency resolution professionals
If any of the member of staff, or the promoter or any other person of the corporate debtor doesn’t assist or co-operate with the IRP, then IRP has a right to file an application before the Authority.
The Authority then will direct such member of staff, promoter or any other person to comply with the instructions of IRP and also to assist and co-operate IRP in gathering information and management of the corporate debtor.
INITIATION OF LIQUIDATION PROCESS
Liquidation process needs to be initiated when the below-mentioned situations arise:
- The resolution plan is failed to be submitted before the adjudicating authority before the expiry of the insolvency resolution process period as provided u/s 12 of IBC.
- The resolution plan doesn’t comply with the requirements as provided u/s 30(4) of IBC.
- If the authority came to know Before the approval of resolution applicant of resolution plan that the decision of liquidating the corporate debtor is being taken by the financial creditors with less than 60% votes of financial creditors.
- If the corporate debtor contravenes the resolution plan which is being approved by the authority and such contravention results in affecting the interest of any person, that person shall make an application to the authority regarding the same. And the authority shall pass any order of liquidation if it came to the notice of the authority that contravention of the resolution plan had been taken place by the corporate debtor.
If the Authority is satisfied with the above-mentioned situations, it shall:
- Make an order declaring the corporate debtor to be liquidated.
- Issue a public announcement providing that the corporate debtor is in liquidation
- Or shall make an order to that authority with which corporate debtor is linked.
VOLUNTARY LIQUIDATION OF A COMPANY
Appointment of Liquidator: Sec. 34 of IBC talks about the appointment of liquidator. It states that when the Authority passes an order for liquidation the IRP, after submitting a written consent to the Authority, acts as a Liquidator.
After the appointment of liquidator u/s 34, all the powers of the board of directors, managerial person and other personnel of the corporate debtor shall cease to have an effect and stand transferred in the IRP.
POWERS OF LIQUIDATOR TO GET ACCESS TO INFORMATION (SECTION 37)
The liquidator shall have the power to access any information systems for admission including an information utility, credit information systems regulated under any law and any database maintained by the board.
Initiating Voluntary Liquidation: To initiate voluntary liquidation, a corporate person who has not committed any default, can initiate it u/s 59(2) and is required to meet the conditions as provided under 59(3), which are:
- Duties of Directors during voluntary liquidation:
To initiate liquidation, a declaration along with a verifying affidavit shall come from the majority of directors of the company declaring that:
- A complete enquiry has been made in the affairs of the company and has an opinion that neither the company has owned any debt nor the company can pay its debt completely even if they sold their assets.
- The company is not being liquidated with the objective of doing any defraud to a person.
The declaration must have any attachment of the audited financial statements, the record of business operations and a report of valuation of the assets of the company which is been prepared by a registered valuer.
- Resolution or Special Resolution:
- The Members of a company in a general meeting shall pass a special resolution for the voluntary liquidation and appointment of an IRP to act as a liquidator.
- Such resolution for the voluntary liquidation as a result of the expiry of its duration fixed by its articles or on the occurrence of any event in respect of which the articles of the company provide that the company shall be dissolved and appointment of an IRP to act as a liquidator.
- If a debt is owed by a company, in such case the creditors representing 2/3rd of the value of debt is required to approve such resolution within 7 days of its being passed.
- In case the company owes the debt then the date on which the creditors approve of the resolution, that date will be considered as the date of commencement of liquidation.
The company shall intimate Registrar of Companies and the Board of its resolution.
FRAUDULENT TRADING OR WRONGFUL TRADING:
If it is found that during the resolution process or the liquidation process, the corporate debtor’s intention of carrying the business was to defraud its creditors then the Authority on the application, made by IRP, shall make liable any person, who was knowingly carrying the business, to contribute the assets of the corporate debtor.
Liability of Director: The Authority shall make an order to the director or partner of the corporate debtor to make any such contribution to the assets of the corporate debtor as it may consider appropriate, if:
- It is known to the director of the partner that there was no reasonable prospect for the avoidance of the commencement of a corporate insolvency resolution process in respect of such corporate debtor;
- No due diligence is being exercised by the directors or the promoters in minimizing the loss of the creditors.
It’ll be considered that the diligence has been conducted by the directors if the person responsible or in charge of conducting due diligence has conducted the due diligence.
PUNISHMENT FOR CONCEALMENT OF PROPERTY (SECTION 68)
When any member of staff, promoter or any person intentionally concealed any property, such person is liable to be punished with the imprisonment for a period which shall not be less than three years and may extend to five years or with fine with not less than one lakh rupees and may extend to one crore rupees or with both.
LANDMARK JUDGMENTS ON INSOLVENCY AND BANKRUPTCY CODE, 2016
- Kishan vs. M/s Vijay Nirman Company Pvt. Ltd–
The Supreme Court ruled that if there is an outstanding lawsuit challenging the arbitration award, the insolvency bankruptcy proceedings cannot be conducted.
In the present case, the court held that the petition to complete the arbitral award under section 34 would exclude existing disputes which would ultimately be carried out in the first stage of the award.
However, the court clarified that the request to challenge the arbitral award under Section 34 may be subject to explicit restrictions. Therefore no petition or overdue request was submitted under section 34 of IBC.
- Cheran Properties Ltd. vs Kasturi and Sons Ltd. &Ors.–
In this case, the court held that an award holder can approach to NCLT for effective enforcement and is not restricted to civil courts. It further expressed that since the award suggests transmission of shares to the Claimant, the directions given in the award can be upheld only by taking it to the tribunal for rectification.
- Innoventive Industries Ltd. v. ICICI Bank & Anr–
This landmark judgment is delivered by (NCLAT). It determined some key requirements that are to be followed when applications are approving under Section7 of the IBC. Section 7 of the Code provides that financial creditors may initiate insolvency bankruptcy proceedings against corporate creditors.
NCLAT said that ICICI Bank has approved the insolvency bankruptcy of the invention industry and the same appeal has been rejected against the order issued by NCLT. They further said that the order of debtor to be declared as the debtor is being passed keeping in view the Principle of Natural Justice.
The Supreme Court ruled that once an insolvency bankruptcy expert is appointed to manage the company, the former director who is no longer a senior executive can no longer appeal on behalf of the company. In the present case, Innoventive I is the only applicant, so It cannot remain an attractive force. Therefore, the Supreme Court refuses to dismiss the appeal, noting that all courts have issued detailed judgments to understand the shift in the legal paradigm.
- Mobilox Innovations Pvt Ltd V. Kirusa Software Pvt. Ltd. National Company Law Tribunal
In this case, the company debtor subcontracted for the work with the creditor, and an agreement of non-disclosure agreement (NDA) was signed in between the parties. The debtors withhold payments to commercial creditors alleging breach of their nondisclosure agreement.
The operating creditor submits a notice of refund of the creditor from the debtor of the company and points out that there is a legal dispute in between the parties regarding the breach of the confidentiality agreement, and the investment creditor makes an application in accordance with sec 9.
The parameters to determine whether there are disputes can be summarized as follows:
- At first glance, conflicts should be real, and they exist naturally in certain facts.
- The reasons for asserting that there are conflicts should not be wrong, hypothetical, illusory, or misunderstood.
- There is no need to prove the existence of the conflict.
- Conflict is natural and will not make you believe in conflict.
- Transmission Corporation Of Andhra Pradesh Limited Vs Equipment Conductors And Cables Limited
In the present case, NCLAT did not mention the merits of the case and offered an opportunity, “If the appeal court cannot make an appropriate order to resolve the request on the merits, it will fail.” Nor did it say how it would be paid if someone was threatened. The Supreme Court ruled in the Mobilox case that the arbitration institution must make the following decision when reviewing an application under Article 9 of the law: (i) defined as “operation.” “Debt” is greater than 1 rupee (ii) in the application Whether the documentary evidence provided indicates that the above debts have not been repaid, or (iii) there is a dispute between the two parties, regardless of whether you have pending litigation or arbitration record, you must submit any procedures to receive your unpaid business related to such disputes before the debt claim notification.
With the establishment of Insolvency Bankruptcy Code 2016, the creditors have been gained so much advantage as all the objects of creditors are covered in the code. And it also made it easier for them to get their debt back from the debtors.
Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India.
Nikhil Mehta & Sons (HUF) &Ors. v. M/s AMR Infrastructures Ltd C.P NO. (ISB)-03(PB)/2017.
 M/s. Innoventive Industries Ltd. vs. ICICI Bank and Anr., MANU/SC/1063/2017.
(Civil) NO. 21825 OF 2017.
Civil Appeal 10025/2017.
CIVIL APPEAL NOs. 8337-8338 OF 2017.