The Terms ‘Insolvency’ and ‘Bankruptcy’:
In common parlance, insolvency and bankruptcy is often used interchangeably. However, there is a marginal difference between these two words. Insolvency refers to a situation when an individual or an entity is not able to meet the financial obligations due to excess of liabilities over assets. On the contrary, bankruptcy is a legal process wherein the court of law passes orders regarding an insolvency of an entity or individual and further also passes an order for its resolution.
In other words, an entity or an individual can be considered insolvent without being bankrupt and insolvency can result in bankruptcy if the insolvent entity is not able to come out from the financial catastrophe.
Corporate Insolvency – Meaning:
Insolvency of a company occurs when the company is unable to pay its debts to the creditors. The following ways enables to check for corporate insolvency:
- The Cash-Flow Test: Is the company currently or in future will it be unable to pay its debts as and when they fall due for payment?
- The Balance Sheet Test: Are the value of the company’s assets less than the number of its liabilities after taking into account as-yet uncertain and future liabilities?
If the response to any one of the above-mentioned questions is positive, then the company is declared insolvent. A company can also be declared insolvent in the following scenarios:
- A court order or a judgment is not yet satisfied.
- A creditor who owed more than £750 has served a formal demand for an undisputed sum at the company’s registered office, the debt is not paid for three weeks.
Corporate Insolvency Resolution Process:
CIRP or Corporate Insolvency Resolution Process is a recovery mechanism for creditors. If a company is insolvent, an operational creditor, a financial creditor or the corporate itself may start the CIRP.
- Financial Creditor is an individual to whom such an amount is legally transmitted or assigned or to who a business debt is owed. For example: financial institutions or banks.
- Operational Creditor is an individual to whom an operational debt is owed or someone to whom such amount has been transferred legally for goods or services done by them. For example: Employees, Vendors, suppliers, government etc.
A provision is provided by the Insolvency and Bankruptcy Code, 2016 for an application for insolvency or bankruptcy of individuals, start-ups, partnership firms, companies and limited liability partnerships. Although a slab of default amount is provided by the Code has in each category, however the final amount is to be informed by the Government to initiate the proceeding while keeping in mind the economic fluctuations. It must be kept in mind that the said amount is not the minimum or maximum fixed amount of debt but rather it is a ‘range’.
CIRP is initiated after making an application. CIRP enables to determine through whether the individual who has defaulted is capable of repayment or not. If it is found that the individual is not capable of repayment of debts, then the company is liquidated or restructured. Following steps are followed for resolution or liquidation of a corporate:
1. Application to NCLT: An application is send to the National Company Law Tribunal (NCLT) by a financial or operational creditor of the company or the company itself can also do so. The application is given to admit that the Company (Corporate Debtor) is into the CIRP. For this, the creditor is required to depict the default payment of a debt that exceeds Rs.1,00,000, and within 14 days the NCLT is required to order by either admitting or denying the application. The financial or operational creditor must comply with different obligations when making their applications before NCLT. An operational creditor is required to make a demand for the unpaid debt on the flip side, a financial creditor is required to submit the record of the default. It is open to the corporate debtor to defend the claim based on the ongoing conflict.
2. Interim Resolution Professional & Moratorium: At the time of admission of a corporate debtor into the CIRP, the board of directors are suspended by him. Moreover, the management is kept under an independent ‘interim resolution professional’. After this period, the management ends up having any hold over the company affairs till the end of the CIRP. Concurrently, a moratorium becomes effective which as a result disallows the following:
- Transfer of its assets
- Start or continuation of any judicial proceedings against the corporate debtor
- Enforcement of any security interest
- Reclamation of any property from it by the owner
- Suspension of supply of essential goods and services.
The moratorium is valid till the corporate debtor is in CIRP. However, the moratorium is not extended to main business contracts by the corporate debtor.
3. Verification and Analysis of Claims: After this, an interim resolution professional will call out and analyse the claims made by the creditors and do a classification of them. Within 30 days of acceptance into CIRP, a Committee of Creditors will be formed that will include all the financial creditors of the corporate debtor.
4. Appointment of Resolution Professional: Within a timespan of seven days of forming of the committee, it will have to do a replacement of interim resolution professional with another resolution professional or sort out to appoint the interim resolution professional as a resolution professional.
5. Approval of the “Resolution Plan”: An approval of resolution plan for the revival of the company must be done within 180 days from the commencement of CIRP by creditors. This period can be extended by NCLT by another 90 days. Any management, person, the creditors or a third party can advance such a plan. The resolution professional must make sure that the resolution plan meets the criteria set out in the Insolvency and Bankruptcy Code, 2016.
- If a plan is approved within this period and sanctioned by NCLT: The approved plan becomes obligatory on the corporate debtor and its members, employees, guarantors, creditors, and other stakeholders involved in the resolution plan. It is the duty of the resolution professional to obtain all necessary approvals required under any law for the time being in force within one year from the date of approval by adjudicating authority.
- If no resolution plan is approved within the said period: If the resolution plan is not approved, then NCLT is bound to order the liquidation of the corporate debtor. After getting the approval of liquidation, the liquidator is appointed by the COC to sell the assets of the corporate debtor and share it amongst the stakeholders. This distribution is made as per Section 53 of the Insolvency and Bankruptcy Code 2016.
For further information, please contact:
Gautam Khurana, Managing Partner
India Law Offices, New Delhi
e: moc.seciffowalaidni@anaruhk.g
t: +91 11 24622216
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