BANKRUPTCY AND INSOLVENCY (LAW444)

Question: 2, 3 & 4

Submitted By:

Abdul Raheman Sudes

L1803

11800971
QUESTION 1:

What do you mean by Insolvency and Bankruptcy? What are the rationale and objectives of the
Code?

ANSWER:

Insolvency:

An entity individual or a company becomes insolvent when they are unable to pay
back their debts. When a person, a group, or an organization cannot repay lenders
back on time, they’re called insolvent. It is either due to their cash flow, or due to
balance sheet. When their cash flow makes it impossible for them to pay debts, or
when they don’t have financial liquidation on their balance sheets, they are unable
to repay their creditors, and hence, become insolvent. Insolvency is a state of being
that might prompt an entity to file for bankruptcy.

Bankruptcy:

This is a legal declaration of one’s inability to pay their debts. When bankruptcy is
filed, one is obligated to pay off whatever is owed, with the government’s help.
There are two primary types of bankruptcies are – reorganization and liquidation
bankruptcy.

 Under reorganization, the debtors re -plan their payment structures to make

paying off debts relatively easier.
 Under liquidation, debtors have to sell off certain assets and make use of
money to repay their debts.

RATIONALE AND OBJECTIVE BEHIND INSOLVENCY AND

BANKRUPTCY CODE:

 To consolidate and amend the laws relating to re-organization and insolvency resolution
of corporate persons, partnership firms, and individuals.
  To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e.
180 days).
 To maximize the value of assets of interested persons.
 To promote entrepreneurship
 To increase the availability of credit.
 To balance all stakeholder’s interest (including alteration). Balance to be done in the
order of priority of payment of Government dues.
 To establish an Insolvency and Bankruptcy Board of India as a regulatory body for
insolvency and bankruptcy law.
 To establish higher levels of debt financing across a wide variety of debt instruments.
 To provide painless revival mechanism for entities.
 To deal with cross-border insolvency.
 To resolve India’s bad debt problem by creating a database of defaulters.

The Code provides a time-bound process for resolving the insolvency of corporate debtors (within 330
days) called the corporate insolvency resolution process (CIRP). The debtor himself or its creditors may
apply for initiation of CIRP in the event of a default of at least one lakh rupees. Under CIRP, a
committee of creditors is constituted to decide regarding the insolvency resolution. The committee may
consider a resolution plan which typically provides for the payoff of debt by merger, acquisition, or
restructuring of the company. If a resolution plan is not approved by the committee of creditors within
the specified time, the company is liquidated. During CIRP, the affairs of the company are managed by
the resolution professional (RP), who is appointed to conduct CIRP.

QUESTION 2:

What do you mean by CIRP? Explain the initiation process of application by financial creditor?

ANSWER:

Corporate Insolvency Resolution Process (CIRP) refers to insolvency proceedings of corporates

whereby any corporate debtor who commits a default would thereby allow a financial creditor,
an operational creditor, or the corporate debtor itself to initiate corporate insolvency resolution
process in respect of such corporate debtor. In this article, we will explain who is eligible to
initiate the Insolvency Proceedings against the corporate Debtor.
If a corporate entity (debtor) becomes insolvent and commits a default, a financial creditor, an
operational creditor or the corporate debtor itself may approach the National Company Law
Tribunal (NCLT) - the Adjudicating Authority for insolvency resolution of corporate persons - to
hand-over an application for initiating CIRP against the defaulter. The procedure of initiating
proceedings and other processes to be followed vary for each category of the creditor.

Initiation process of application by financial creditor:

IBC provisions define a financial creditor as someone to whom a financial debt is owed.
Subsequently, financial debt, in terms of real estate, has been defined as: any amount that is
raised under a real estate project from an allottee is deemed to be an amount which has the
commercial effect of a borrowing. Home buyers, thus, have been classified as financial creditors,
and they have to follow such specific application procedure as laid out for financial creditors.

For financial creditors who are allotted of a real estate project, an application to initiate CIRP
against a corporate debtor will have to be filed jointly by not less than ten percent of the total
number of the concerned project’s allotted or not less than one hundred of such allotted of the
project, whichever is lower.

Such creditors shall have to make an application along with a prescribed fee, and also have to
furnish:

 Evidence of the debt default or record of default which is stored with an information
utility (a person or entity entitled to act as a repository of legal information relating to any
debt/claim, as submitted by a financial or operational creditor and verified and
authenticated by the other parties to the debt/claims, such as National E-Governance
Services Limited.
 Name of the resolution professional which the creditors propose to be the interim
resolution professional
 Any other information as required by the Insolvency and Bankruptcy Board of India
(IBBI).
NCLT shall, within 14 days of the receipt of the application made, establish the existence of a
default, through accessing the records of an information utility or as per other evidence provided
by the financial creditor. If the same is not done within the time-limit, the Tribunal shall record
its reasons for the same in writing.

If the Tribunal has established the default, is satisfied with the application made, and sees that
there are no pending disciplinary proceedings against the proposed resolution professional, it
may, by its order, admit the application. If the Adjudicating Authority finds issues in any of the
above three components, it will, before rejecting the application, give seven days to the applicant
to rectify that mistake; the seven days starting from the date of receipt by an applicant of the
notice to rectify the application. If admitted, NCLT will communicate the order to the financial
creditor and the corporate debtor, and the resolution process shall begin from the date of
admission of the application.

QUESTION 3:

What do you mean by CIRP? Explain the initiation process of application by operational
creditor?

ANSWER:

Corporate Insolvency Resolution Process (CIRP) refers to insolvency proceedings of corporates

whereby any corporate debtor who commits a default would thereby allow a financial creditor,
an operational creditor, or the corporate debtor itself to initiate corporate insolvency resolution
process in respect of such corporate debtor. In this article, we will explain who is eligible to
initiate the Insolvency Proceedings against the corporate Debtor.

When the Corporate Debtor defaults in making payments to its creditors the process of Corporate
Insolvency Resolution Process (CIRP) can be initiated against it by its creditors. The Insolvency
and Bankruptcy Code, 2016 (hereafter "the Code") provides the process for insolvency resolution
process (IRP). For this purpose the government also enacted the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and
Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereafter "the
Rules"). The Central government on March 24, 2020 notified that the minimum threshold under
section 4 of the Code to initiate any proceeding of insolvency against a Corporate Debtor shall be
not less than one crore rupees.

Initiation process of application by operational creditor:

As defined in section 5(20) of the Code, an operational creditor include all person/corporation
who are legally owed operational debt and include those to whom such debt has been legally
assigned or transferred. Operational debt, as defined under section 5(21) of the Code, includes
debts with respect to the exchange of goods or services. It also includes dues to an employee or a
debt in respect of repayment of dues arising under any law, payable to the Central or State
Government or any other authority.

Where a Corporate Debtor commits a default, an operational creditor itself may initiate CIRP
with respect to such Corporate Debtor by following the steps as under:

 a notice as prescribed under Form 3 of the Rules and,

 copy of invoice demanding payment as prescribed under Form 4 of the Rules
 Rule 6 of the Rules specify that the CIRP against the Corporate Debtor shall be initiated
as specified under From 5 of the Rules.
 Particulars of the Corporate Debtor such as name, identification number, address, capital
structure as per the article of association of the debtor;
 Particulars of the proposed interim resolution professional (if proposed);
 Particulars of the operational debt such as total debt amount, date from which it is due,
amount of debt in default, date on which default occurred;
 Additionally attach all relevant documents in support of the claims.
 the application made is complete;
 there is no repayment payment of the unpaid operational debt;
 the invoice or notice for payment to the Corporate Debtor has been delivered by the
operational creditor;
 no notice of dispute has been received by the operational creditor or there is no record of
dispute in the information utility;
 the application made under is incomplete;
  there has been repayment payment of the unpaid operational debt;
 the creditor has not delivered the invoice or notice for payment to the Corporate Debtor;
 notice of dispute has been received by the operational creditor or there is a record of
dispute in the information utility;

The Operational Creditors are eligible to initiate the Corporate Insolvency Resolution Process against a
Corporate Debtor when there is nonpayment of debt owed by the Corporate Debtor. The sections and
rules have clearly defined the complete procedure and requirement of filing a case before NCLT under the
Code for speedy resolutions.