UNIVERSITY OF PETROLEUM & ENERGY STUDIES

SCHOOL OF LAW
BA.LLB (CONSTITUTIONAL LAW) (HONS.)

SEMESTER-VI

ACADEMIC YEAR: 2019-2020 SESSION: JAN-MAY

COMPANY LAW
TOPIC:-
INSOLVENCY RESOLUTION PROCESS AND LIQUIDATION PROCESS
UNDER THE SUPERVISION OF Mrs. Priyanka Chaudhary

SUBMITTED BY: -

SHREESH BINDAL (R154217080) (500062168)

 Insolvency Resolution Process and Liquidation Process
Introduction
Insolvency and Bankruptcy are often used interchangeably. However, there is a thin line of
difference between these two words.
Insolvency is a financial situation, where an entity or an individual is unable to meet the
financial obligations due to excess of liabilities over assets, whereas, Bankruptcy is a legal
procedure where the court of law passes orders with respect to insolvency of an individual or
entity and consequently passes orders for its resolution.
Thus, an individual or an entity can be insolvent without being bankrupt and insolvency can
lead to bankruptcy if the insolvent individual or entity is unable to overcome the financial
catastrophe.
Corporate Insolvency-
A company is declared insolvent if it is unable to pay its debts to its creditors. Following are
two ways to check for corporate insolvency:

1. 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?
2. The Balance Sheet Test- Are the value of the company’s assets less than the number
of its liabilities.

In the above two situation a company can, be declared to be insolvent. Example- A company
can who has assets of 1 Crore and liability of 2 crore, can be insolvent if the creditor asks for
the debt and the company was not able to pay it.

Corporate Insolvency Resolution Process-

The insolvency resolution process (IRP) is under the Insolvency and Bankruptcy Code, 2016,
where the National Company Law Tribunal (NCLT) initiates a corporate insolvency
resolution process (CIRP) when a company defaults on making payment to creditors. A
financial creditor, operational creditor or corporate itself can file an application before NCLT
for initiating IRP when default has occurred. In case of housing project, after amendment in
the code, a homebuyer can also approach NCLT for initiating IRP if a developer fails to
provide possession of the house or refund the money.
Who is Financial Creditor?
Bank or Financial institution or any other lender or anyone providing loan, credit facility or
other financial assistance falls into the category of “Financial Creditors”.
Who is operational creditor?
Someone who has been extended a payment of credit during the course of business is
an “Operational Creditor”. Suppliers and service providers are covered under operational
creditor.
Initiation of Insolvency Resolution Process-
CIRP is initiated after making an application. CIRP is the process through which it is
determined whether the person who has defaulted is capable of repayment or not. If a person
is not capable of repaying the debt the company is restructured or liquidated. The Code has
further provided slabs of default amount in each category however the final amount is to be
notified by the Government.
The following are the steps or process-

 Financial Creditor-

Insolvency resolution process by Financial Creditor (Section 7)

1. Financial creditor either by himself or jointly shall initiate filing of application

before NCLT against the corporate debtor for insolvency proceedings.
2. The proof of default and the name of the proposed insolvency professional to be
appointed shall be submitted along with the application.

NCLT has to entertain the said application within 14 days of filing of such application. NCLT
can dismiss the application.

 Operational Creditor

Insolvency resolution process by Operational Creditor (Section 9)

Operational creditor has to give 10 days of prior notice to corporate debtor. If the company
didn’t pay the amount back within that period than the Operational Creditor can file
application before NCLT.
Thus, a financial or operational creditor of the company or the company itself can apply to
the National Company Law Tribunal (NCLT). The application is made to admit that the
Company (Corporate Debtor as per IBC) is into corporate insolvency resolution process.
Announcement of Moratorium
Upon the admission of insolvency resolution application before it, NCLT will make a public
announcement for the submission of claims by the creditors. When a corporate debtor is
admitted into the CIRP, it suspends the board of directors. Also, the management is placed
under an independent ‘interim resolution professional’.  Further, from this point onward the
management ceases to have any control over the company affairs till the end of the CIRP.
Also, NCLT appoints the interim resolution professional.
Simultaneously, a moratorium becomes effective which prohibits:
  Continuation or initiation of any legal proceedings against the corporate debtor;
 Transfer of its assets;
 Enforcement of any security interest;
 Recovery of any property from it by an owner;
 Suspension or termination of the supply of essential goods and services, the
moratorium lasts till the corporate debtor is in CIRP.

However, the moratorium does not extend to key business contracts entered into by the
corporate debtor. On the date on which the resolution process is approved or on the date of
liquidation order the moratorium shall cease to have effect. Insolvency resolution
professional or Committee of creditors do not have any powers, conferred by the Code, to
invalidate/withdraw or cancel any of the pending actions or proceedings involving the
corporate debtor. There will be no impact on the proceedings which are pending before the
imposition of moratorium except that during moratorium period, such proceedings or actions
will be adjourned sine die.

Verification and Analysis of Claims-

At this stage, interim resolution professional will summon and verify the claims made the
creditors and also classify them. After that, within 30 days of acceptance into CIRP, will form
a Committee of Creditors (COC) which comprises of all the financial creditors of the
corporate debtor.

Appointment of Resolution Professional-

Within seven days of the forming the committee, the COC will have to either resolve to
appoint the interim resolution professional as a resolution professional or to replace the
interim resolution professional by another resolution professional.

Formation of Creditors’ Committee-

Insolvency professional after submission of claims by all the creditors shall form a creditor’s
committee and all the creditors who have submitted the claims shall be a part of creditors’
committee. As per Section 21 (2) of the Code, the creditors’ committee shall consist of only
financial creditors. Any resolution plan can be implemented only if it has the approval of
75% of the creditors with voting right in accordance with the voting share assigned.

As per Section 24 (3) (c) of the Code, operational creditors having aggregate dues of at least
10% of the total debt are only given the notice of the meeting. Operational creditors cannot
be the members of the committee and it is irrespective of the claim size.

The decision of the Creditors’ Committee with respect to the reason of inability of the
corporate debtor to pay back the debts, whether it is a business or financial crisis, shall pave
the way to the committee to either go for restructuring plan to the creditors or for liquidation
process.

 Creditors committee shall hold their first meeting within seven days of
appointment and may appoint a final insolvency resolution professional or may
give affirmation to the interim insolvency professional to be appointed as
insolvency professional with the approval of 75% votes of the creditors of the
creditors committee.
 The partners, directors will not have voting rights but they shall attend the
meeting.
 Operational creditors shall have one representative joining the meeting on behalf
of them but the representative shall not have the voting right.

To enable the resolution applicant to form a resolution plan, the resolution professional shall
prepare an information memorandum. Resolution professional shall, if satisfied by the
restructuring of repayment plan submitted by the resolution applicant, present the plan to the
Creditors’ committee for approval. The plan will be confirmed based on the 75% of votes of
the creditors of the Creditors’ committee in favour.

If the approval is obtained then NCLT will order the execution of the restructuring plan in a
prescribed manner.

The moratorium shall cease to have effect after the approval by NCLT and the resolution
professional will forward all the records and documents to the board of directors to conduct
the insolvency resolution process effectively.

Approval of the resolution plan within the prescribed time period

A resolution plan for the revival of the company must be approved within 180 days from the
commencement of CIRP by creditors. The NCLT can extend this period by another 90 days.
Any person, management, the creditors or a third party can propose such a plan. Resolution
professional is responsible to ensure that the plan meets the criteria set out in Insolvency and
Bankruptcy Code, 2016.

 If a plan is approved within this period and sanctioned by NCLT: The approved

resolution plan becomes binding on the corporate debtor and its employees, members,
creditors, guarantors and other stakeholder involved in the resolution plan. It is the duty if
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: In case the resolution plan is not
approved then NCLT is obliged to order the liquidation of the corporate debtor. After the
approval of liquidation, COC appoints the liquidator to sell the assets of the corporate
 debtor and share them among the stakeholders. The distribution is made according to
section 53 of the Insolvency and Bankruptcy Code 2016.

Liquidation Process

What is liquidation?

Liquidation is a process through which a company which is running is shut down and its
existence comes to an end. This often happens when the companies are unable to pay its
creditors and hence need to sell off its assets to pay of them. Though in another version this
could be a voluntary act as well where law ensures that all the debts of a company into
existence is paid before it is closed or shut down.

Liquidation process can be initiated under following circumstances as of section 33 of

the IBC

 When no resolution plan is submitted by interim resolution professional as received

from adjudicating authority on or before the expiry of insolvency resolution period.

 When the resolution plan as received by interim resolution professional is non-

compliant to section 31.

 When a request is received from committee of creditors to liquidate the corporate

debtor during the corporate insolvency resolution period and same is communicated by the
interim resolution professional to the adjudicating authority.

 When the corporate debtor disobeys the resolution plan which is approved by
adjudicating authority and the person or creditor who is getting affected by this file an
application to adjudicating authority for liquidation of corporate debtor and the
adjudicating authority finds the corporate debtor guilty.

Process of Liquidating a Company

The details of the process when voluntarily liquidating a limited company depend largely
on the type of liquidation that is chosen. However, the five basic steps below are
included within all of the procedures:

1. An Insolvency Practitioner is appointed as Liquidator.  

2. The company’s assets are then assessed and realised (liquidated).  

 3. If there are any creditors they are then paid in order of priority.  

4. Surplus cash is distributed to the shareholders.  

5. The company is finally dissolved and struck-off the registrar of companies

(Companies House).

Time Period-

There is no set time-frame to liquidate a limited company and with several variables
dependent on each case, it is challenging to give an accurate time-frame without
sufficient information.

However, once engaged, the Insolvency Practitioners will act immediately and the
company can be placed into liquidation within a two-to-three-week period if sufficient
information is provided, promptly.

The liquidator will remain in office until all of their responsibilities have been addressed.