Insolvency and Bankruptcy Code,2016 (IBC,2016) came in to force on 28th May 2016. The law relating to reorganization and insolvency of corporate body is dealt with by this act.
What can be done when the Corporate Debtor fails to repay the dues?
If a corporate debtor fails to repay the dues to the financial creditor, such financial creditor by himself or jointly with other creditors may initiate corporate insolvency process in respect of such corporate debtor.
Such process can be initiated by filing an application with the adjudicating authority - National Company Law Tribunal (NCLT) under Section 7(1) stating the details of unpaid dues by the corporate debtor. NCLT may scrutinize the record and evidence received to ascertain the default and may accept or reject such application.
Operational Creditor must send a demand notice of unpaid dues to the debtor along with the copy of invoice stating such due. The debtor must within 10 days of receipt of such notice convey to creditor about any existing dispute or if the debt is already cleared by sending evidence supporting such claim.
If no repayment or reply is received after 10 days from delivery of notice, the operational creditor may file an application before NCLT for Corporate Insolvency Resolution Process along with relevant invoice, an affidavit stating the nonpayment of debt by corporate debtor, copy of financial records of operational creditor confirming such nonpayment and other required information.
Corporate Insolvency Resolution Process (CIRP)
The creditor may propose to appoint resolution professional to act as interim resolution professional to be appointed by NCLT within 14 days of such proposal. When no such proposal is made, NCLT shall ask the Insolvency and Bankruptcy Board for recommendation.
CIRP shall begin from the date of admission of application by NCLT and is to be completed within 180 days from such date. NCLT may extend the period only once and not beyond 90 days if required. NCLT must make public announcement of such process being initiated.
On the date of commencement of insolvency, NCLT shall by order declare moratorium for prohibition of institution of suits or continuing of any proceeding or execution of any judgment, order or decree in any court, tribunal or arbitration panel or any other authority.
It shall also prohibit transfer, alienation or disposal of any of the assets by corporate debtor. Enforcing Security interest created by corporate debtor in respect of its property and recovery of any property by owner which has been occupied by corporate debtor is also prohibited. Such order will have effect till the completion of CIRP.
Appointment of Interim Resolution Professional and Resolution Professional
Resolution Professional, according to IBC 2016, is an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.
Interim Resolution Professional appointed by NCLT will deal with the management of affairs, assets, finances and other operations required of corporate debtor along with collating the claims of all the creditors in respect of the debt of such corporate debtor.
Interim Resolution Professional is also responsible for monitoring the assets of the corporate debtor and constituting the committee of all financial creditors who are entitled to claim of recovery of dues from the corporate debtor.
The financial creditors’ committee appointed by Interim Resolution Professional shall by voting in accordance with the framework of the act, appoint the Resolution Professional. Such Resolution Professional shall conduct entire Corporate Insolvency Resolution Process and draft an information memorandum on the basis of which a resolution plan is drafted by a resolution applicant.
According to IBC, 2016 resolution applicant means any person who submits a resolution plan to the resolution professional and resolution plan means a plan proposed by any person for insolvency resolution of the corporate debtor.
If NCLT doesn’t receive the resolution plan before completion of period of CIRP, it shall pass an order for liquidation. The Resolution Professional shall act as liquidator for the process of liquidation unless replaced by NCLT. It is the duty of the Liquidator to verify claims of all the creditors, to enforce control over and evaluate the assets and property of the corporate debtor and prepare a report.
Liquidator shall also take necessary actions over immovable and movable property, negotiable instruments, any ongoing legal proceeding as he deems required for the liquidation. He is also responsible for obtaining professional assistance from any person, settling claims of all the creditors and investigating financial affairs of the corporate debtor.
The liquidator also has the power to determine the value of claims the creditors are entitled to, although every creditor possesses the right to approach NCLT within 14 days if he feels the liquidator has wrongly rejected his claim.
Distribution of Assets of the Corporate Debtor
The funds collected from the sale of liquidation assets shall be distributed according to the provision of the Act.
- Costs incurred for the Insolvency Process and Liquidation are to be paid in entirety from such proceeds.
- Workmen’s dues and the debt owed to secured creditors rank at equal priority.
- Wages and unpaid dues of the employees excluding workmen.
- Debts owed to unsecured creditors.
- Dues in respect of Central or State Government and debt owed to secured creditor following the enforcement of security interest rank at equal priority.
Dissolution Of Corporate Debtor
After complete liquidation of the assets of the corporate debtor, the liquidator shall make an application to NCLT for the dissolution of such corporate debtor. NCLT then, shall pass an order stating the dissolution of Corporate Debtor.
The insolvency and bankruptcy code ensures that the creditors are not deprived of what they rightfully claim from the debtor. The major requirement here is that the creditors must be able to prove that the debtor has not paid the dues after receiving the notice of demand while the debtor to be free of such claim must prove he has actually paid the dues giving evidence required.