The meaning of Insolvency and Bankruptcy is not the same. “Insolvency” means the situation where an entity (the debtor) cannot raise enough cash to meet its obligations or to pay debts as they become due for payment
Bankruptcy is the term for when an individual is declared bankrupt by the Court because they are insolvent. People go bankrupt for two reasons; one is if their assets are less than their liabilities the second is where they are unable to pay their debts when they fall due.
The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy
The provisions of this Code shall apply to—
- any company incorporated under company act 2013(or any previous company law)
- any other company governed by any special Act
- any Limited Liability Partnership incorporated
- such other body incorporated under any law
- partnership firms and individuals,
- The Code provides for insolvency professionals as intermediaries who would play a key role in the efficient working of the bankruptcy process.
- The role of the IP encompasses a wide range of functions, which include adhering to the procedure of the law, as well as accounting and finance-related functions.
- In the resolution process, the insolvency professional verifies the claims of the creditors, constitutes a creditors committee, runs the debtor’s business during the moratorium period, and helps the creditors in reaching a consensus for a revival plan.
- In liquidation, the insolvency professional acts as liquidator and bankruptcy trustee.
- Where any corporate debtor commits a default, the following persons:
- a financial creditor,
- an operational creditor, or
- the corporate debtor itself
may initiate a corporate insolvency resolution process in respect of such corporate debtor.
Persons not entitled to make an application under insolvency
The following persons shall not be entitled to make an application to initiate a corporate insolvency resolution process –
- a corporate debtor undergoing a corporate insolvency resolution process; or
- a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
- a corporate debtor or a financial creditor who has violated any of the terms of the resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
- a corporate debtor in respect of whom a liquidation order has been made
The adjudicating authority for corporate insolvency and liquidation is the NCLT. Appeals arising out of NCLT orders lie to the National Company Law Appellate Tribunal within 30 days and, thereafter, to the Supreme Court of India on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order.
For individuals and other persons, the adjudicating authority is the DRT. Appeals arising out of DRT orders lie to the Debt Recovery Appellate Tribunal within 30 days and thereafter, to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order.
Summarized Pre-pack Insolvency Resolution Process Framework
Provisions of Act and Regulations
Relevant Section/ Regulation/ Rule(s)
|Pre-application stage or Initiation Stage||Applicability Pre-pack Insolvency Resolution Process||Applicable on Micro, Small and Medium Enterprises (MSME), having a minimum default as defined in section 4 of the IBC Code||As per Notification dated 9th April 2021, the minimum default for initiating pre-pack insolvency resolution process (PIRP) has been notified as INR 10,00,000/-.||Section 54A (1) and (2)|
|Appointment of Insolvency Professional under Pre-pack Insolvency Resolution Process||
Unrelated Financial Creditor’s holding at least 10% of value, may propose the name of the Insolvency Professional whose appointment shall be approved by unrelated Financial Creditor’s holding at least 2/3rd in value.
The Resolution Professional to be appointed shall be eligible as per conditions laid down in Regulation 7
|Such proposal and approval shall be obtained in a meeting called by the corporate debtor. Notice of such meeting shall be sent to all unrelated Financial Creditors, at least Five days prior to the meeting unless a shorter notice period is decided. If there are no unrelated Financial creditors, approval in a similar manner shall be taken from operational creditors.||
Section 54A (1) (e) read with Regulation 14
|Approval from unrelated Financial Creditor’s||With the assent of at least 2/3rd of the unrelated Financial Creditor’s||
It is not clear whether the required majority, that is, 2/3rd of the Financial Creditor’s is to be determined on the basis of the Financial Creditor’s attending the meeting, or the total value of Financial Creditors.
It must be noted that there appears to be a conflict in the law – while the Code required that the approval shall be sought from 2/3rd of the Financial Creditor’s, a meeting is quorate with 1/3rd Financial Creditor’s present. Hence, approval shall be based on present and voting
|Section 54A (3)|
|Duties of the Insolvency Professional||
Prior to the filing of the application, the Insolvency Professional shall be required to file and prepare a report confirming whether the corporate debtor meets the requirements under section 54A (2), file such reports as may be required.
Such duties shall cease to exist if the application for initiation of the Pre-pack Insolvency Resolution Process is not filed within Ninety days of approval from Financial Creditors, or where the application is admitted/ rejected.
First, the format of such report, set out in Form P8, does not specify as to whom the Report shall be addressed to. Hence, while it is understood that the report shall be filed with the Adjudicating Authority, the law is ambiguous.
Further, regulation 13 provides that the forms as may be specified by IBBI shall be filed on an electronic platform. Hence, it is expected that the forms to be filed by the Resolution Professional shall be prescribed by way of a notification and/ or circular.
|Section 54B read with Regulation 13|
Filing of application till admission/ rejection) or Application
|Filing of application by the corporate debtor||The application for initiation must be filed by the corporate debtor, not later than ninety days from the date of approval by the unrelated Financial Creditor. The corporate debtor shall be required to give several declarations (see Form P7 and Form P8 of Prepack Rules)||The application shall specify the name and details of the appointment of the Resolution Professional approved by the unrelated Financial Creditor’s, and be filed in accordance with Form 1 of the Prepack Rules||Section 54C, read with Regulation 16 to 18, and Rule 4|
|Approval by AA||The Adjudicating Authority shall admit or reject the application within fourteen days from the date of filing||
The timelines imposed on the Adjudicating Authority are not compulsory – they are directory in nature (See Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors).
Hence, the timeliness of the process shall significantly depend on the time taken by the Adjudicating Authority to admit/ reject the Order.
|Section 54C (4)|
|Admission of PIRP till submission of Plan to Adjudicating Authority or Plan Stage||Public Announcement||Public announcement shall be made within two days of PIRP Commencement Date in Form P9, and be sent to every creditor||
The requirement of sending the public announcement to every creditor seems to be a superfluous requirement – aimed benefits of cost and time saving shall become redundant where the number of creditors is very huge.
Further, the very concept of a ‘public’ announcement shall become infructuous if the notice is required to be sent individually to all creditors
|Section 54E (1) (c), read with Regulation 19|
|List of Claims submitted by the corporate debtor||
The Resolution Professional shall confirm the list of claims submitted to it by the corporate debtor, and inform every creditor regarding its claims, seeking objections if any. Such objections may be communicated to the Resolution Professional within 7 days from the receipt of a communication by Resolution Professional.
Such a list of claims shall be maintained in Form P-10, and shall be updated and made available for inspection by creditors, members, partners, directors, and guarantors of the corporate debtor and be filed with the Board & presented at the Committee of the creditors meeting.
As per section 54G (1), the list of claims shall, at the first instance, be submitted by the corporate debtor to the Resolution Professional within Two days of Pre-pack Insolvency Resolution Process Commencement Date
|In order to avoid a lengthy process, it is suggested that the objection may be filed by the creditors on the basis of the public announcement itself, within say, Fifteen days from the date of such public announcement.||
Section 54F (2) (a) to (d), read with Regulation 20
Section 54G (1)
|Debtor-In-Possession Approach||Unless an application in moved by at least 2/3rd of the Committee of creditors members and the same has been approved by the Adjudicating Authority, the management of affairs of the corporate debtor shall continue to vest with the Board of Directors, subject to conditions as imposed by the Committee of creditors inter-alia prior approval for transaction beyond the threshold stipulated by the Committee of creditors||See discussion above||Section 54H, read with Regulation 50|
|Formation of Committee of Creditors||
A Committee of creditors, comprising of unrelated Financial Creditors, shall be formed within Seven days of the Pre-pack Insolvency Resolution Process Commencement date.
Where there is no Financial Creditor’s, the Committee of creditors shall comprise of Ten largest operational creditors and One representative of Employees and Workmen each
|Section 54I (1), (3) read with Reg 24-26|
|Conducted of Meeting of Committee of creditors||
The first meeting of the Committee of creditors shall be conducted within seven days of its constitution.
The meeting may be called at the instance of the Resolution Professional, or upon requisition by at least 1/3rd of the Committee of creditors members.
Notice of the meeting shall be sent to all Committee of creditors members, at least three days prior to the meeting, which may be reduced if decided by the Committee of creditors, and the meeting shall be quorate if members representing at least 33% of the voting share are present
The notice period shall in any case, not be less than 24 hours, or where there is an AR, 48 hrs.
The quorum is only determined on the basis of voting power, and not in number. Hence, where majority dues are held by only 1 Financial Creditor, the meeting can be conducted with only One unrelated Financial Creditor- this is very counterintuitive, and the same cannot be the intent of law.
Hence, a meeting may be quorate if members representing at least 33% of the voting power, not being less than Two is number, are present.
Further, the law remains silent on the participation of the corporate debtor in such Committee of creditors meetings – whether the corporate debtor has the right to attend or is required to mandatorily attend the meeting as an invitee is not provided for.
|Section 54I (2), read with Regulation 27 to 34|
|Resolution Plan submitted by corporate debtor Than COC invitation of resolution plans||
Section 54K requires the corporate debtor to submit a ‘Base Resolution Plan’ to the Resolution Professional within Two days of pre-pack insolvency resolution process Commencement Date.
The Committee of creditors may require invitation of resolution plans from outsiders where –
(a) The Committee of creditors does not approve of the base resolution plans; or
(b) The base resolution plan impairs the rights of the operational creditors.
In such cases, the Resolution Professional shall, not later than twenty-one days from the Pre-pack insolvency resolution process Commencement Date, float an invitation, therein mentioning –
a) Manner of improving a plan.
b) Basis for considering a plan significantly better than the base resolution plan;
c) Tick size;
d) Basis for evaluations.
e) the Last date for submission of plan;
As per timelines envisaged, the Committee of creditors shall consider the Base Resolution Plan in the first meeting of the Committee of creditors to be held within Fourteen days from Pre-pack insolvency resolution process Commencement Date (PCD), such that invitation from others if required, can be floated within Twenty-One days of the Pre-pack insolvency resolution process Commencement Date.
The basis of evaluation shall be subject to several quantitative as well as qualitative.
“Significantly better” shall be determined by the Committee of creditors itself.
|Section 54K, read with Regulation 42 to 47|
|CoC Approval of Resolution Plan||
A plan received from outsiders can only be considered by the Committee of creditors if the same is “significantly better” than the base resolution plan.
If no plans are received, the base resolution plan may be conducted.
The Resolution Professional may also provide an opportunity to the submitters to improve their plan, by increasing their tick size, evaluation score etc.
The resolution plan having a higher score on completion of the process of improvement under sub-regulation (4) shall be considered by the committee for approval
It is understood that while the Committee of creditors shall invite for plans where the operational creditor's interests are impaired, no such provisions seem to be in place from the plan submitted by others – they are only required to comply with section 30 (2) of the Code.
|Section 54K (8) to (12), read with Regulation 48|
(Submission of Plan to NCT)
|Submission of Resolution Plan to unrelated Financial Creditor’s||
Resolution plan, upon approval by Committee of creditors, shall be submitted to the Adjudicating Authority, not later than Ninety days of Pre-pack insolvency resolution process Commencement Date.
The resolution professional shall, within seven days of the order of the Adjudicating Authority approving a resolution plan, intimate each claimant, the principle or formula, as the case may be, for payment of debts under such resolution plan.
Where no resolution plan is approved by the committee or where the committee has approved the termination of the process, the resolution professional shall file an application in Form P13 to the Adjudicating Authority for termination of the process.
Along with the resolution plan, the Resolution Professional shall also submit a compliance certificate to National Company Law Tribunal in Form P-12.
The time period within which the application for termination, if so required. Shall be filed, has not been prescribed.
|Section 54L, read with Regulation 49|
|Others||Physical/Electronic Meetings and Communication||The meetings required under these Regulations may be held either in electronic or physical mode or in a combination of both; & all communications required under these Regulations shall be made by electronic means as far as possible.||Regulation 3|
|Essential Supplies of Goods and Services||
The essential goods and services referred to in section 14(2) shall mean-
b) information technology services,
c) Telecommunication services; and
to the extent, these are not a direct input to the output produced or supplied by the corporate debtor
|Pre-pack insolvency resolution process cost (PIRP Cost)||The pre-pack insolvency resolution process is an exhaustive list including the cost of raising interim finance, the fee payable to IP, costs incurred in running the business of the corporate debtor (in case of a shift from DIP to CIP), the fee payable to the AR of a class of creditors, and such costs directly related to the Pre-pack insolvency resolution process, and approved by the Committee||
Section 5(23C) (b) specifically provides that only the fee payable to the IP during the Pre-pack insolvency resolution process, that is, after the order of the Adjudicating Authority admitting the application for pre-pack insolvency resolution process shall form part of pre-pack insolvency resolution process Cost, whereas section 54B (3) provides that where an application is admitted, the fee of the IP during the pre- National Company Law Tribunal stage shall also form part of the pre-pack insolvency resolution process Cost.
Hence, the provisions seem to be overlapping as regards the fee of IP during the pre-NCT stage.
Further, the law is ambiguous w.r.t. treatment of other costs incurred during the pre- National Company Law Tribunal stage
Hence, the Pre-pack insolvency resolution process cost must be widened to cover the costs incurred on and from the date of approval by the Financial Creditors.
Section 5 (23C) r/w
|Access to Books of Accounts and Records||
The resolution professional may access the books of account, records, and other documents to the extent relevant for discharging his duties under the Code, of the corporate debtor held with-
(a) members, promoters, partners, directors, and joint venture partners of the corporate debtor;
(b) professionals and advisors engaged by the corporate debtor;
(c) depositories of securities;
(d) registries that record the ownership of assets; and
(e) contractual counterparties of the corporate debtor.
|Appointment of Professionals for assistance||The Resolution Professional may appoint a professional for assistance with respect to the Pre-pack insolvency resolution process||The Resolution Professional shall not outsource his/ her primary functions||Section 54F (3) (e) read with Regulation 10.|
|Disclosure of Pre-pack insolvency resolution process cost||The Resolution Professional shall make disclosures at the time of appointment and, thereafter, in accordance with the code of conduct as set out in the IBBI (Insolvency Professionals) Regulations, 2016.||Regulation 11|
|Preservation of Records & Books of Accounts||The Resolution Professional shall preserve a physical as well as an electronic copy of the records relating to the process of the corporate debtor as per the record retention schedule, as may be required by the Board in consultation with insolvency professional agencies||The Board shall issue a circular providing for the manner in which the records of the Pre-pack insolvency resolution process shall be preserved.||Regulation 12
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