FAQs on the Insolvency Resolution Process for Corporate Persons in India
We answer the most frequently asked questions about the insolvency resolution process for corporate persons in India, as provided in the Insolvency and Bankruptcy Code, 2016.
On February 4, 2022, India’s insolvency regulator, the Insolvency and Bankruptcy Board of India (IBBI), released a publication titled Frequently Asked Questions (FAQ) on the Insolvency and Bankruptcy Code (IBC), 2016. The revised edition has been published in association with the Insolvency and Bankruptcy Code Committee of Institute of Chartered Accountants of India (ICAI).
The objective behind publishing the guide is to provide useful guidance to industry professionals and other stakeholders to clarify interpretation and improve understanding of India’s insolvency law.
What is the purpose of enactment of the Insolvency and Bankruptcy Code, 2016?
As per the Preamble to the IBC, the purpose of this Act is to:
- Consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals.
- Fix time periods for implementation of the Insolvency and Bankruptcy Code, 2016 in a time bound manner.
- Maximize the value of assets of stakeholders.
- Promote entrepreneurship.
- Increase/stimulate availability of credit.
- Balance the interests of all the stakeholders, including alteration in the order of priority of payment of Government dues.
- Establish IBBI as a regulatory body for the IBC.
To whom shall the provisions of IBC apply?
According to Section 2, the provisions of IBC shall apply for insolvency, liquidation, voluntary liquidation, or bankruptcy involving the following types of entities:
- Any company incorporated under the Companies Act, 2013 or under any previous company law
- Such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf
- Any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act
- Personal guarantors to corporate debtors
- Any Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnership Act 2008
- Partnership firms and proprietorship firms
Insolvency resolution and liquidation for corporate persons FAQs
Below we provide a summary of Insolvency Resolution and Liquidation for Corporate Persons in FAQ format.
What is the threshold limit for making an application for insolvency and liquidation of corporate persons?
The provisions relating to the insolvency and liquidation of corporate debtors shall be applicable only when the amount of the default is INR 10 billion (US$133682.24) or more. This minimum amount was revised by the Central Government vide notification S.O.1205(E), dated March 24, 2020, increasing the minimum amount of default from INR 100,000 to INR 10 billion.
Further, vide Notification S.O. 1543(E), dated April 9, 2021, the Central Government has specified INR 1 million as the minimum amount of default for matters relating to the pre-packaged insolvency resolution process of the corporate debtor.
Who is the adjudicating authority for corporate persons?
The National Company Law Tribunal (NCLT) shall be the adjudicating authority for the insolvency resolution and liquidation process of a corporate person.
What does the term dispute mean under IBC?
As per Section 5 (6) of the IBC, a dispute includes a suit or arbitration proceedings relating to:
- Existence of the amount of debt
- Quality of goods or service
- Breach of a representation or warranty
What are the components of financial debt?
As per Section 5(8) of the IBC, financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes:
- Money borrowed against the payment of interest.
- Amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent.
- Amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock, or any similar instrument.
- Amount of any liability in respect of any lease or hire purchase contract, which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed.
- Receivables sold or discounted other than any receivables sold on non-recourse basis.
- Amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.
- Derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price. For calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account.
- Counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit, or any other instrument issued by a bank or financial institution.
- Amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in above sub clauses (a) to (h) of this clause.
What is included in operational debt?
As per Section 5(21) of the IBC, operational debt means a claim in respect of:
- Provision of goods; or
- Provision of services including employment; or
- Debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority.
Who is a related party with respect to an individual under the IBC?
According to Section 5 (24A) of the IBC, a related party in relation to an individual means a:
- Person who is a relative of the individual or a relative of the spouse of the individual.
- Partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the individual is a partner.
- Person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee that may be exercised for the benefit of the individual.
- Private company in which the individual is a director and holds along with relatives, more than two percent of its share capital.
- Public company in which the individual is a director and personally holds or holds along with relatives – more than two percent of its paid-up share capital.
- Body corporate whose board of directors, managing director, or manager – in the ordinary course of business – acts on the advice, directions, or instructions of the individual.
- LLP or a partnership firm whose partners or employees – in the ordinary course of business – acts on the advice, directions, or instructions of the individual.
- Person on whose advice, directions, or instructions, the individual is accustomed to act.
- Company, where the individual or the individual along with its related party, own more than fifty percent of the share capital of the company or controls the appointment of the board of directors of the company.
Who is termed as relative with reference to an individual under the IBC?
As per explanation to Section 5 (24A) of the IBC:
- Relative, with reference to any person, means anyone who is related to another, in the following manner, namely:
- Members of a Hindu Undivided Family
- Son’s daughter and son
- Daughter’s daughter and son
- Grandson’s daughter and son
- Granddaughter’s daughter and son
- Brother’s son and daughter
- Sister’s son and daughter
- Father’s father and mother
- Mother’s father and mother
- Father’s brother and sister
- Mother’s brother and sister
- Wherever the relation is that of a son, daughter, sister, or brother – their spouses shall also be included.
Who is a resolution applicant?
As per Section 5 (25) of the IBC, a resolution applicant means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of the sub-section (2) of Section 25 or pursuant to Section 54K, as the case maybe.
Who is a corporate applicant?
As per Section 5(5) of the IBC, corporate applicant means:
- Corporate debtor.
- A member or partner of the corporate debtor who is authorized to make an application for the corporate insolvency resolution process or the pre-packaged insolvency resolution process, as the case may be, under the constitutional document of the corporate debtor.
- An individual who is in charge of managing the operations and resources of the corporate debtor.
- A person who has the control and supervision over the financial affairs of the corporate debtor.
What does the term resolution plan mean?
According to Section 5 (26) of the IBC, resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II, which may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation, and demerger.
Who may initiate corporate insolvency resolution process against a corporate debtor?
The corporate insolvency resolution process may be initiated against any defaulting corporate debtor by:
- Financial creditor
- Operational creditor
- Corporate debtor itself
Process for initiation of corporate insolvency resolution
- As per Section 7 of the IBC, a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by Central Government, may file an application before the adjudicating authority (NCLT) for initiating corporate insolvency resolution process against a corporate debtor who commits a default in payment of its dues.
- For the financial creditors, referred to in clauses (a) and (b) of subsection (6A) of Section 21, an application for initiation corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10 percent of the total number of such creditors in the same class, whichever is less.
- For those financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10 percent of the total number of such allottees under the same real estate project, whichever is less.
- Additionally, where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first or second provisos and has not been admitted by the NCLT before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within 30 days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.
- The financial creditor shall along with the application in Form I (prescribed under The Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016) and accompanied by prescribed fees, give evidence in support of the default committed by the corporate debtor. In case applicant is an assignee or transferee of a financial contract, the application must be accompanied with a copy of the assignment or transfer agreement. The financial creditor shall also give the name of the resolution professional to act as interim resolution professional and any other information as may be specified by the IBBI. The applicant shall serve a copy of the application to the registered office of the corporate debtor and to the IBBI, by registered post, or speed post, or by hand or by electronic means, before filing with the NCLT. In case the application is made jointly by financial creditors, they may nominate one among them to act on their behalf.
- The NCLT shall within 14 days of the receipt of the application, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.
- Where the NCLT is satisfied that a default has occurred and the application by the financial creditor is complete and there are no disciplinary proceedings pending against the proposed resolution professional, it may by order, admit such application made by the financial creditor. Otherwise, the application may be rejected. However, the applicant may rectify the defect within seven days of receipt of notice of rejection from the NCLT. The corporate insolvency resolution process shall commence from the date of admission of the application.
- As per Sections 8 and 9 of the IBC, on the occurrence of default, an operational creditor shall first deliver a demand notice (Form 3) and a copy of invoice (Form 4) demanding payment of the amount involved in the default to the corporate debtor. As per Rule 5(2) of The Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016, it may be delivered to the corporate debtor at the registered office by hand, by registered post, or speed post with acknowledgement due, or by electronic mail service to a whole-time director or designated partner or key managerial personnel, if any, of the corporate debtor. A copy of demand notice or invoice demanding payment served by an operational creditor shall also be filed with information utility, if any.
- The corporate debtor shall within a period of 10 days of receipt of demand notice – notify the operational creditor about the existence of a dispute, if any, or record of pendency of any suit or arbitration proceedings filed before receipt of such notice or invoice in relation to such dispute. The corporate debtor shall also provide the details of payment of unpaid operational debt in case the debt has or is being paid.
- After the expiry of 10 days, if the operational creditor does not receive the payment or the notice of a dispute that existed even before the demand notice was sent, they may file an application before the NCLT for initiating a corporate insolvency resolution process and may propose a resolution professional to act as interim resolution professional and furnish along with application, inter alia, copy of certificate from financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available.
- The NCLT shall within 14 days of receipt of the application, after ascertaining as to whether the application is complete and whether payment of operational debt is made, admit or reject the application. However, before rejecting the application, an opportunity shall be given to the applicant to rectify the defect within seven days of receipt of rejection.
As per Section 10 of the IBC, where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the NCLT.
As per Rule 7 of The Insolvency and Bankruptcy (Application to Adjudicatory Authority) Rules, 2016, the application shall be made in Form 6 and the applicant shall serve a copy of the application to the Board before filing with NCLT.
The corporate applicant shall, along with the application, furnish:
- Information relating to books of account and other documents for such period as may be specified;
- Information relating to the resolution professional proposed to be appointed as an Interim Resolution Professional; and
- Special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case maybe, approving filing of the application.
The NCLT shall within 14 days of receipt of application, by an order:
- Admit the application, if it is complete and no disciplinary proceeding is pending against the proposed resolution professional; or
- Reject the application, if it is incomplete or any disciplinary proceeding is pending against the proposed resolution professional. However, applicant would be allowed to rectify the defect within seven days of receipt of notice of such rejection.
Withdrawal of application for insolvency resolution
Can an admitted application be withdrawn under Section 7, 9, or 10 of IBC?
Yes, as per Section 12A of the IBC, the NCLT may allow the withdrawal of application admitted under Section 7, 9, or 10, on an application made by the applicant with the approval of 90 percent voting share of the Committee of Creditors, in such manner as may be specified.
What shall be the effect to admission of application under Section 7, 9, or 10?
As per section 13, the NCLT, after admission of the application under Section 7 or Section 9, or Section 10, shall, by an order:
- Declare a moratorium for the purposes referred to in Section 14.
- Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under Section 15.
- Appoint an interim resolution professional in the manner as laid down in Section 16.
The public announcement referred to above shall be made immediately after the appointment of the interim resolution professional; here, ‘immediately’ means not later than three days as per Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
What is the effect of order of moratorium?
As per Section 14(1) of the IBC, on the insolvency commencement date, the NCLT shall by order declare moratorium for prohibiting all of the following, namely:
- The institution of suits or continuation of any pending suits or proceedings against the corporate debtor. including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority.
- Transferring, encumbering, alienating, or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.
- Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property – including any action under the SARFAESI Act, 2002,
- The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
When shall the moratorium cease to have effect?
As per Section 14 of the IBC, the order of moratorium shall have effect from the date of admission order till the completion of the corporate insolvency resolution process.
Also, if the NCLT approves the resolution plan during corporate insolvency resolution process period under Section 31(1) or passes an order for liquidation of corporate debtor, the moratorium shall cease to have effect from the date of such approval or liquidation order.
Timelines associated with the corporate insolvency resolution process
What is insolvency resolution process period?
As per Section 5(14) of the IBC, the insolvency resolution process period means the period of 180 days beginning from the insolvency commencement date and ending on 180th day.
When will the corporate insolvency resolution process commence?
The corporate insolvency resolution process shall commence from the date of admission of an application for initiating corporate insolvency resolution process by the NCLT. It is referred to as the insolvency commencement date.
What is the corporate insolvency resolution process initiation date?
As per Section 5(11) of the IBC, the date of filing of an application before the NCLT for initiating corporate insolvency resolution process is referred to as the initiation date.
What is the time limit for completion of the insolvency resolution process?
Section 12 of the IBC states that the corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate the process.
However, the NCLT may, on an application made by the resolution professional, extend the duration of such process ‘beyond one hundred and eighty days’ by such further period as it thinks fit, but not exceeding 90 days. Such extension will be granted on the basis of a resolution passed by the Committee of Creditors by a vote of 66 percent of voting shares, after being satisfied that the corporate insolvency resolution process cannot be completed within 180 days.
It must be noted that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once.
Further, the corporate insolvency resolution process shall mandatorily be completed within a period of 330 days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.
What is the significance of the corporate insolvency resolution commencement date?
The commencement date of the corporate insolvency resolution process is the beginning of moratorium or a calm period under Section 14 of the IBC till the completion of the corporate insolvency resolution process. During this period, all suits and legal proceedings, etc. against the corporate debtor are suspended to give time to the entity to achieve value maximization and resolution.
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