Insolvency Resolution Process Under IBC Becomes Operational

On 1st December 2016, the Ministry of Corporate Affairs (MCA), Government of India (GOI) notified the provisions relating to the corporate resolution process under the Insolvency & Bankruptcy Code 2016 (IBC).  The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 were also notified on 30th November 2016. In a separate notification, the GOI repealed the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). As a result the matters pending before BIFR and AAIFR under SICA abated.

Earlier, the GOI had notified Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 with effect from 29th November 2016 and Insolvency and Bankruptcy Board of India (Insolvency Professionals Agencies) Regulations, 2016 were notified with effect from 21st November 2016.

 

Corporate Insolvency Resolution Process under IPC 2016

Written in July 2016 

1.         The Parliament of India recently enacted the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) paving way for introduction of the much-needed modern framework to deal with insolvency and bankruptcy of corporate entities and natural persons in India. The Code provides comprehensive provisions for resolution of insolvency of corporate entities.   This paper is a comprehensive presentation of the road map of corporate insolvency resolution process provided by the Code.  Although few observations have been in few places, the goal of this paper is not to analyse the provisions of corporate insolvency resolution process, critically.

I.          Commencement

2.         The standard to be met for commencement of insolvency proceedings is central to the design of an insolvency law. As the basis upon which insolvency proceedings can be commenced, this standard is instrumental to identifying the debtors that can be brought within the protective and disciplinary mechanisms of the insolvency law and determining who may make an application for commencement, whether the debtor, creditors or other parties.

Trigger point for initiation?

3.         A corporate insolvency resolution process may be initiated under chapter II of the Code in respect of a corporate debtor that has committed a default.  The trigger point for initiating the corporate insolvency resolution process is the occurrence of default.  A default[1] would have occurred when the debtor fails to pay whole or any part or installment of the amount of debt that has become due and payable. The “debt”[2] has been defined under the Code as a liability or obligation in respect of a claim, which is due from any person and includes a financial debt and operational debt.  While a financial creditor is required to present record of default before the National Company Law Tribunal (hereinafter referred as the NCLT), being the adjudicating authority under the Code, for initiation of corporate insolvency resolution process, an operational creditor must issue a statutory notice to corporate debtor in the manner provided in the Code.

4.         Cessation of payment is a standard test that is used extensively for commencement of insolvency proceedings in many laws around the world. This requires that the debtor has generally ceased making payments and will not have sufficient cash flow to service its existing obligations as they fall due in the ordinary course of business. Indicators of a debtor’s general cessation of payments may include its failure to pay rent, taxes, salaries, employee benefits, trade accounts payable and other essential business costs. As such, this test puts the defining factors within the reach of creditors. Reliance on this test is designed to activate insolvency proceedings sufficiently early in the period of the debtor’s financial distress to minimize dissipation of assets and avoid a race by creditors to grab assets that would cause dismemberment of the debtor to the collective disadvantage of all creditors.[3]

5.         As the cessation of payment, i.e. occurrence of default in payment of debt is the trigger point for initiating corporate insolvency resolution process, it is important to understand the meaning and scope of  “debt”.  As stated, the Code defines “debt” as a liability or obligation in respect of a claim, which is due from any person and includes a financial debt and operational debt.  The “claim”[4], financial debt” and “operation debt” are defined in the Code. 

6.         A “claim” means (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured. The corresponding obligation of the debtor to pay may arise out of a financial debtor an operational debt. Broadly stating, “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money. [5]   It includes:

·      Money borrowed against the payment of interest;


·      Any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

·      Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

·      The 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;

·      Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

·      Any derivative transaction entered into in connection with protection 30 against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction
shall be taken into account;

·      Any 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;

·      The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred above.

7.         An “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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.[6]

Who can initiate the process?

8.         The process for initiating corporate insolvency resolution may be initiated by any of the following:

A.     A financial creditor

B.     An operational creditor or

C.     The corporate debtor itself

9.         The following persons are however, not eligible to make an application to initiate corporate insolvency resolution process:

·             A corporate debtor undergoing a corporate insolvency resolution process; or a corporate debtor having completed corporate insolvency resolution process 12 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 resolution plan which was approved twelve months before the date of making of an application; or

·             A corporate debtor in respect of whom a liquidation order has been made.

A.        Commencement by financial creditor

Who is a financial creditor?

10.       A financial creditor is a person to whom a financial debt (as defined earlier) is owed and includes a person to whom such debt has been legally assigned or transferred to. 

Application by financial creditor

11.       A financial creditor may initiate the process either by itself or jointly with other financial creditors by filing an application before the adjudicating authority under the Code, that is, the NCLT, if a default has occurred in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.  Besides the form and manner and accompanied fee prescribed by the central government, the financial creditor shall, along with the application furnish:

·      Record of the default recorded with the information utility or such other record or evidence of default as may be specified;

·      The name of the resolution professional proposed to act as an interim resolution professional; and

·      Any other information specified by the Board for Insolvency and Bankruptcy of India (hereinafter referred to as the Board).[7]

12.       It may be noted that the Code provides for the setting up of information utilities that will create and store financial information in a universally accessible format; accept electronic submissions of financial information from persons who are under obligations to submit financial information under the Code; get the information received from various persons authenticated by all concerned parties before storing such information; provide access to the financial information stored by it to any person who intends to access such information; and publish such statistical information as may be specified by regulations.[8]

Ascertaining existence of debt default by the NCLT

13.       Within 14 days of receipt of application by the NCLT, it must 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. If the NCLT is satisfied that (i) a default has occurred; or (ii) the application made by financial creditor is complete; or (iii) there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application. Under SICA, admission of reference made to BIFR was by way of an administrative act of registration of reference by the registry of BIFR.  Now, an order must be passed by the NCLT.  It appears that the corporate debtor need not be heard by the NCLT while ascertaining the existence of default.  The regulations to be framed should therefore ensure that reasonable opportunity is provided to the debtor in respect in the process of listing of information with information utilities.

14.       The NCLT can reject the application if it finds that default has not occurred or the application made by financial creditor is incomplete or any disciplinary proceeding is pending against the proposed resolution professional. The NCLT is required to provide an opportunity to the applicant to rectify the defect in the application if the NCLT finds the application to be defective. The applicant must rectify the defect in his application within 7 days of receipt of such notice from the Adjudicating Authority.  

15.       It is not clear if 14 days period provided to the NCLT to pass orders on the application is in respect of ascertaining the default or for passing the final order on the application and includes 7 days to be given to the applicant for rectification of defect, if necessary?  It is not clear if this period of 14 days can be extended as part of total period of 90 days.  It is also not clear if the application is rejected for failure of the applicant to rectify defect, can the applicant file a fresh application?  

Date of commencement

16.       The corporate insolvency resolution process shall commence from the date of admission of the application of financial creditor by the NCLT.  Order of admission of such application shall be communicated by the NCLT to the applicant and corporate debtor, and of rejection to the financial creditor, within seven days.

Punishment for false information in application

17.       If any person furnishes information in the application, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees.  An application shall be deemed to be false in material particulars in case the facts mentioned or omitted in the application, if true, or not omitted from the application as the case may be, would have been sufficient to determine the existence of a default under the Code.

B.        Commencement by Operational Creditor

Who is an operational creditor?

18.       An operational creditor is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. As already mentioned, an operational debt means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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.

Filing of application

19.       Unlike in the case of a financial creditor, an operational creditor may, if it wants to file an application for initiation of corporate insolvency resolution process, on the occurrence of a default, deliver a demand notice, together with invoice of unpaid debt, demanding payment of the amount involved in the default to the corporate debtor in the form and manner as may be prescribed by the central government.  Where the operational creditor issues such notice/invoice, the corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice, bring to the notice of the operational creditor:

§  Existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

§  The repayment of unpaid operational debt by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

20.       If the operational creditor does not receive payment from the corporate debtor or notice of the dispute, after the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment, the operational creditor may file an application before the NCLT for initiating a corporate insolvency resolution process.

21.       Besides the form and manner and accompanied fee prescribed by the central government, the financial creditor shall, along with the application furnish:

·      A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

·      An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

·      A copy of the certificate from the financial institutions maintaining accounts
of the operational creditor confirming that there is no payment of an unpaid operational
debt by the corporate debtor;

·      Such other information as may be specified; and

·      Propose a resolution professional to act as an interim resolution professional.  This requirement to propose a resolution professional does not appear to be mandatory.

Admission or rejection of application

22.       On receipt of the application from operational creditor by the NCLT, it shall, within 14 day admit the application and communicate such decision to both, the operational creditor and the corporate debtor if:

·      The application made is complete;

·      There is no repayment of the unpaid operational debt;

·      The invoice or notice for payment to the corporate debtor has been 40 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; and

·      There is no disciplinary proceeding pending against any resolution professional proposed

23.       The NCLT shall reject the application and communicate such decision to the operational creditor and the corporate debtor, if

·      The application made is incomplete;

·      There has been repayment 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; or

·      Any disciplinary proceeding is pending against any proposed resolution professional:

24.       Before rejecting an application on the grounds mentioned above, the NCLT shall give a notice to the operational creditor to rectify the defect in his application within 7 days of the date of receipt of such notice.

Date of commencement

25.       Where an application made by the operational creditor is admitted, the corporate insolvency resolution process shall commence from the date of admission of such application.  There is no provision requiring the order of admission or rejection of application to be communicated by the NCLT to applicant as in the case of a financial creditor.

Punishment for non-disclosure of dispute or repayment of debt by operational creditor

26.       If (a) an operational creditor wilfully or knowingly concealed in an application under section 9 the fact that the corporate debtor had notified him of a dispute in respect of the unpaid operational debt or the full and final repayment of the unpaid operational debt; or
 (b) any person who knowingly and wilfully authorised or permitted such concealment, such operational creditor or person, as the case may be, shall be punishable with imprisonment for a term which shall not be less than one year but may extend to five years or with fine which shall not be less than one lakh rupees but may extend to one crore rupees, or with both.  An application shall be deemed to be false in material particulars in case the facts mentioned or omitted in the application, if true, or not omitted from the application as the case may be, would have been sufficient to determine the existence of a default under the Code.

C.         Commencement by corporate debtor

27.       A corporate debtor, who has committed a default, can also file an application for initiating corporate insolvency resolution process with the NCLT.

Who is a corporate debtor?

28.       A corporate debtor is a corporate person who owes a debt to any person.

Application by corporate debtor

29.       Besides the form and manner and accompanied fee prescribed by the central government, the corporate debtor shall, along with the application furnish:

·      Its books of account and such other documents relating to such period as may be specified; and

·      The resolution professional proposed to be appointed as an interim resolution professional.

30.       The NCLT shall, within a period of 14 days of the receipt of the application from corporate debtor, by an order:

·      Admit the application, if it is complete. It appears that no notice is required to be given to the financial or operational creditor before admission of the application.

·      Or, the NCLT may reject the application, if it is incomplete. Before rejecting an application, the NCLT must give a notice to the corporate debtor to rectify the defects in his application within seven days from the date of receipt of such notice.

Date of commencement

31.       The corporate insolvency resolution process shall commence from the date of admission of the application. There is no provision requiring the order of admission or rejection of application to be communicated by the NCLT to applicant as in the case of a financial creditor.

Punishment for non-disclosure of dispute or repayment of debt by corporate debtor

32.       If a corporate debtor provides information in the application under section 10 which is false in material particulars, knowing it to be false and omits any material fact, knowing it to be material; or
 (b) any person who knowingly and wilfully authorised or permitted the furnishing of such information, such corporate debtor or person, as the case may be, shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to five years or with fine which shall not be less than one lakh rupees, but which may extend to one crore rupees, or with both. An application shall be deemed to be false in material particulars in case the facts mentioned or omitted in the application, if true, or not omitted from the application as the case may be, would have been sufficient to determine the existence of a default under the Code.

D.        Declaration of moratorium and public announcement

33.       With regard to creditors, one of the fundamental principles of insolvency law is that insolvency proceedings are collective proceedings, which require the interests of all creditors to be protected against individual action by one of them. Many insolvency laws include a mechanism to protect the value of the insolvency estate that not only prevents creditors from commencing actions to enforce their rights through legal remedies during some or all of the period of the liquidation or reorganization proceedings, but also suspends actions already under way against the debtor. Such a mechanism is variously termed a “moratorium”, “suspension” or “stay”, depending on the effect of the mechanism.[9]

34.       The Code provides for a moratorium from creditors action against the corporate debtor.  Where the NCLT passes an order of admission of an application for commencement of corporate resolution process, the NCLT shall, by an order:

·      Grant a moratorium mentioned in section 14.

·      Appoint an interim resolution professional in the manner as laid down section 16 of in the Code.

·      Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims immediately after the appointment of the interim resolution professional.

Moratorium

35.       An order of moratorium must be effective date of commencement of corporate insolvency resolution process. The most common approach to application of the stay is for it to apply on commencement of the proceedings, when issues of eligibility, jurisdiction and satisfaction of the commencement criteria will have been resolved and it is clear that proceedings should be commenced rather than the application be denied. The NCLT is required to pass the order on the date of admission of the application. Going by the plain reading it appears that the NCLT is required to pass an explicit order-granting moratorium.  Moratorium will not operate by fiction of law.  The order declare moratorium shall prohibit all of the following:

·      The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest 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

Exclusion from moratorium

36.       The order of moratorium should not effect supply of essential goods or services to the corporate debtor, which shall not be terminated or suspended or interrupted during moratorium period. This is important to explore resolution of the corporate debtor as a going concern. 

37.       The Code empowers the Central Government to, in consultation with any financial sector regulator, exclude any transactions from the applicability of moratorium. This practice is seen to be contrary to international best practices. To ensure transparency and predictability, it is highly desirable that an insolvency law clearly identify the actions that are to be included within and specifically excepted from the scope of the stay, irrespective of who may commence those actions, whether unsecured creditors (including priority creditors such as employees, legislative lien holders or Governments), third parties (such as a lessor or owner of property in the possession or use of the debtor or occupied by the debtor), secured creditors or others.

Term of moratorium

38.       The Code provides that the order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process. Where at any time during the corporate insolvency resolution process period, if the NCLT approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

39.       It is surely desirable for the stay to apply to secured creditors for a sufficient period of time to ensure that the reorganization can be conducted in an orderly manner without the possibility of assets being separated before it can be determined how those assets should be treated in reorganization and an appropriate plan approved.  However, to avoid application of the stay for an uncertain or unnecessarily lengthy period and encourage a speedy resolution of the proceedings, there is also an advantage in limiting the application of the stay to the time it may reasonably take for a reorganization plan to become effective, provided that that does not take a significant period of time and the proceedings are not allowed to continue for years without a plan being proposed and approved.  Such a limitation may also have the advantage of providing secured creditors with a degree of certainty and predictability as to the duration of the period of postponement of their rights and the treatment of those rights in the plan.  The difficulty with a fixed time period approach is that the time period may not always be sufficiently long, depending on the size and complexity of the reorganization and the plan required, and may be difficult to enforce.

Punishment for contravention of moratorium

40.       If the corporate debtor or any of its officer violates the provisions of section 14 (moratorium), any such officer who knowingly or wilfully committed or authorised or permitted such contravention shall be punishable with imprisonment for a term which shall not be less than three years, but may extend to five years or with fine which shall not be less than one lakh rupees, but may extend to three lakh rupees, or with both.  If any creditor violates the provisions of section 14 (moratorium), any person who knowingly and wilfully authorised or permitted such contravention by a creditor shall be punishable with imprisonment for a term which shall not be less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

Public announcement

41.       Public announcement of commencement of proceedings is important to inform all stakeholders, affect the moratorium, invite clams, etc.  The public announcement of the corporate insolvency resolution process is required to be made by the NCLT. It shall contain the following information:

·      Name and address of the corporate debtor under the corporate insolvency resolution process;

·      Name of the authority with which the corporate debtor is incorporated or registered;

·      The last date for submission of claims;


·      Details of the interim resolution professional who shall be vested with the

·      Management of the corporate debtor and be responsible for receiving claims;`

·      Penalties for false or misleading claims; and

·      The date on which the corporate insolvency resolution process shall close.

E.         Interim resolution professional: appointment, tenure, power and duties

42.       An insolvency professional plays a central role in the effective and efficient implementation of an insolvency law, with certain powers over debtors and their assets and a duty to protect those assets and their value, as well as the interests of creditors and employees, and to ensure that the law is applied effectively and impartially. An insolvency professional interim resolution professional is to be appointed by the NCLT within 14 days from the date of commencement corporate resolution proceedings. The resolution professional, as proposed by the applicant seeking commencement of process shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.  Where in an application for corporate insolvency resolution process made by an operational creditor an interim resolution professional is not proposed for appointment, the NCLT shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional.  The Board shall, within 10 days of the receipt of a reference from the NCLT recommend the name of an insolvency professional against whom no disciplinary proceedings are pending, for appointment.

Term of interim resolution professional

43.       The term of the interim resolution professional shall not exceed 30 days from date of his appointment.

Management of affairs of corporate debtor

44.       Fundamental to insolvency proceedings is the need to identify, collect, preserve and dispose of the debtor’s assets. Many insolvency systems place these assets under a special regime sometimes referred to as the insolvency estate, over which the insolvency professional will have specified powers, subject to certain exceptions.  Under the Code, the management of the affairs of the corporate debtor shall vest in the interim resolution professional from the date of appointment of interim resolution professional.  The powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional.  The officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional.  The financial institutions maintaining accounts of the corporate debtor shall
act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.

Powers of interim resolution professional

45.       The Code specifies the duties and functions that the interim insolvency resolution professional will have to perform in the proceedings.  It is important that the law and regulations provide the interim insolvency resolution professional with the powers necessary to carry out those duties and functions efficiently and effectively.  As the management of the affairs of the corporate debtor shall vest in the interim resolution professional from the date of appointment of interim resolution professional, and the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional, the interim resolution shall:

·      Act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;

·      Take such actions, in the manner and subject to such restrictions, as may be specified by the Board;

·      Have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;

·      Have the authority to access the books of accounts, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified.

Duties of interim resolution professional

46.       The interim resolution professional shall perform the following duties:

·      Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to:

ü  Business operations for the previous two years;

ü  Financial and operational payments for the previous two years;

ü  List of assets and liabilities as on the initiation date; and


ü  Such other matters as may be specified;

·      Receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

·      Constitute a committee of creditors;

·      Monitor the assets of the corporate debtor and manage its operations until a

·      Resolution professional is appointed by the committee of creditors;

·      File information collected with the information utility, if necessary; and

·      Take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including:

ü  Assets over which the corporate debtor has ownership rights which may be located in a foreign country;

ü  Assets that may or may not be in possession of the corporate debtor;

ü  Tangible assets, whether movable or immovable;


ü  Intangible assets including intellectual property;

ü  Securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;

ü  Assets subject to the determination of ownership by a court or authority:

•       To perform such other duties as may be specified by the Board.  

•       The term "assets" does not include the following, namely assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment; assets of any Indian or foreign subsidiary of the corporate debtor; and
such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

Power to raise interim finance

47.       The interim resolution professional has been provided the authority to raise interim finance. However, interim resolution professional cannot create security interest over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property.   No prior consent of the creditor is required where the value of such property is not less than the amount equivalent to twice the amount of the debt.

Duty of interim resolution professional to protect assets and seek assistance

48.       Essential objectives of an effective insolvency law are protecting the value of the insolvency estate against diminution by the actions of the various parties to insolvency proceedings and facilitating administration of those proceedings in a fair and orderly manner. The parties from whom the estate needs the greatest protection are the debtor and its creditors. The Code provides that the interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.  For this purposes, the interim resolution professional have been provided with the authority:

·      to appoint accountants, legal or other professionals as may be necessary;

·      to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process

·      to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and

·      to take all such actions as are necessary to keep the corporate debtor as a going concern.

Extending co- operation to interim resolution professional

49.       It is a legal obligation of the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor to extend all assistance and cooperation to the interim resolution professional as may be required by him in managing the affairs of the corporate debtor and to protect assets.  Where any personnel of the corporate debtor, its promoter or any other person required to assist or cooperate with the interim resolution professional does not assist or cooperate, the interim resolution professional may make an application to the NCLT for necessary directions. In such cases, the NCLT shall direct such personnel or other person to comply with the instructions of the resolution professional and to cooperate with him in collection of information and management of the corporate debtor.

Obligations towards resolution professional

50.       In case the interim resolution professional is not appointed as a resolution professional, the interim resolution professional is required to provide all the information, documents and records pertaining to the corporate debtor in his possession and knowledge to the resolution professional.

F.         Role and participation of creditors

51.       Creditors have a significant interest in the corporate debtor’s business once insolvency proceedings are commenced. As a general proposition, many insolvency laws provide that such interests are safeguarded by the appointment of an insolvency representative. For a number of different reasons, many insolvency laws facilitate direct creditor involvement in the proceedings. As the party with the primary economic stake in the outcome of the proceedings, creditors may lose confidence in proceedings where key decisions are made without consulting them by individuals who may be perceived by creditors as having limited experience or expertise in the debtor’s type of business or a lack of independence, depending upon the manner in which the representative is appointed.

52.       Creditors are often in a good position to provide advice and assistance with respect to the debtor’s business and to monitor the actions of the insolvency representative, providing a check against possible abuse of insolvency proceedings and excessive administrative costs, as well as a means of processing and distributing information. The desirability of facilitating high levels of creditor participation must be balanced against the need to ensure that the creditor representation mechanism remains efficient and cost-effective and avoids creditors involving themselves in matters that will not have an impact on their interests (although often it may be difficult to draw a clear distinction between those matters which do have such an impact and those which do not).

Committee of creditors

53.       In terms of the mechanisms for participation, some insolvency laws provide for full meetings of creditors to be convened at key points in the proceedings. Other laws permit the formation of a committee, on which creditors sometimes may share representation with equity holders and possibly other parties in interest, comprising a smaller number of creditors (which number may be specified in the insolvency law) to facilitate the participation in the administration of the estate. The former approach is most useful in cases with small numbers of creditors or where creditors are located in the same geo- graphical region. The latter may be more useful where there are large numbers of creditors or creditors are located in different regions or even different countries. The mechanism used for participation will also depend upon the immediate issue before creditors. Many insolvency laws include both of these approaches, with significant issues, such as approval of a reorganization plan, to be considered by meetings of creditors.  Where a committee is appointed it should have the right to act independently of the insolvency professional in order to ensure fair and unbiased representation of creditors’ interests.

54.       The Code provides for the interim resolution professional to constitute a committee of creditors after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. The formation of the creditor committee is designed to facilitate active creditor participation in insolvency proceedings. That the power of decision making tilts heavily in favour of creditors in the insolvency resolution process is a matter of discussion for another paper.

Composition of creditors committee

55.       The committee of creditors to be constituted by interim resolution professional shall comprise of all financial creditors of the corporate debtor. But, a related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors.  In cases where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.  A person who is both a financial creditor as well as an operational creditor, shall be a financial creditor to the extent of the financial debt owed by the corporate debtor, and shall be included in the committee of creditors, with voting share proportionate to the extent of financial debts owed to such creditor; and such person shall be considered to be an operational creditor to the extent of
the operational debt owed by the corporate debtor to such creditor.

56.       If an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer. Where the terms of the financial debt extended as part of a consortium arrangement
or syndicated facility or issued as securities provide for a single trustee or agent to act for all financial creditors, each financial creditor may authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share; represent himself in the committee of creditors to the extent of his voting share; appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.  The Board has the power to specify the manner of determining the voting share in respect of financial debts issued as securities under sub-section (6) of section 21 of the Code.

Powers of creditors committee

57.       International best practices require that where actions to be taken in the course of the proceedings will have a significant impact on the creditor body, it is desirable that all creditors be entitled to receive notice of, and to vote on, those actions. These actions may include voting to select the insolvency representative, where an insolvency law provides creditors with this role; approval of a reorganization plan; approval of post-commencement finance; and on other significant events such as sale of substantial assets outside the ordinary course of business.

58.       As per the Code, the committee of creditors shall, inter alia have the right to:

§  Appoint the resolution professional in its first meeting. It may be recalled that the term of the interim resolution professional is for a maximum period of 30 days from date of his appointment.  The committee also has the right to replace the resolution professional at any stage.  

§  Require the resolution professional
to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process. When so requested, the resolution professional must make available any financial information within a period of 7 days.

§  Approve the resolution plan.

§  Approval certain actions of resolution professional

59.       The role and powers of creditors committee is discussed in some detail in later sections relating to various dimensions of corporate resolution process.

Approval of committee of creditors for certain actions

60.       Prior approval of the committee of creditors by the resolution professional is required the for the following actions:

·      Raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;

·      Create any security interest over the assets of the corporate debtor;

·      Change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company;

·      Record any change in the ownership interest of the corporate debtor;

·      Give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;

·      Undertake any related party transaction;

·      Amend any constitutional documents of the corporate debtor;

·      Delegate its authority to any other person;

·      Dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties;

·      Make any change in the management of the corporate debtor or its subsidiary;

·      Transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business;

·      Make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; or

·      Make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor.

61.       The resolution professional is required to seek the vote of the creditors prior to taking any of these actions at a meeting of the committee of creditors convened by him. The committee of creditor must approve these actions by a vote of seventy five percent of the voting shares.

62.       Any action to the contrary taken by the resolution professional without seeking the approval of the committee of creditors in the manner as required shall be void.  The committee of creditors may report such actions of the resolution professional under to the Board for taking necessary actions against him under this Code. 

Decision making by committee of creditors

63.       The Code requires that all decisions of the committee of creditors shall be taken by a vote of not less than seventy-five per cent of voting share of the financial creditors. Where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and comprise of such persons to exercise such functions in such manner as may be specified by the Board.

Meeting of creditors committee

64.       The Code requires the first meeting of the committee of creditors to be held within 7 days
of the constitution of the committee of creditors. The members of the committee of creditors may meet in person or by such electronic means as may be specified by the central government.

Conduct of meetings of creditors committee

65.       The meetings of the committee of creditors are to be conducted in such manner as may be specified by the Code and the regulations framed by the central government.  All meetings of the committee of creditors are to be conducted by the resolution professional, who shall give notice of each meeting of the committee of creditors to

•       Members of committee of creditors

•       Members of the suspended board of directors or the partners of the corporate persons, as the case may be;

•       Operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent of the debt.

66.       The directors, partners and one representative of operational creditors may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings. The absence of any such director, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting.

67.       Any creditor who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor in a meeting of the committee of creditors.  The fees payable to such insolvency professional representing any individual creditor will be borne by such creditor.

Voting by committee of creditors

68.       In the committee of creditors, each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.  The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board.   Although the directors, partners and one representative of operational creditors may attend the meetings of committee of creditors, but they do not have any right to vote in such meetings.

G.        Resolution professional: appointment, removal, powers and functions

Appointment of resolution professional

69.       The committee of creditors, may, in the first meeting, by a majority vote
of not less than seventy-five percent of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.  If the committee of creditors decides to continue the interim resolution professional as resolution professional, it shall communicate its decision to the interim resolution professional, the corporate debtor and the NCLT.  Where the committee of creditors decides to replace the interim resolution professional, it is required to file an application before the NCLT for the appointment of the proposed resolution professional.  The NCLT, in turn, shall forward the name of the proposed resolution professional to the Board for its confirmation. Appointment will be made by NCLT in such cases only after confirmation by the Board.  If the Board does not confirm the name of the proposed resolution professional within 10 days of the receipt of the name of the proposed resolution professional, the NCLT shall, by order, direct the interim resolution professional to continue to function as the resolution professional until such time as the Board confirms the appointment of the proposed resolution professional.

Conduct of corporate resolution process by resolution professional

70.       The resolution professional is responsible for the conduct of the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.  For this purpose, the resolution professional has the same powers and must perform same duties as vested or conferred on the interim resolution professional.

Duty of resolution professional to protect assets and seek assistance

71.       It is the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.  For this purpose, the resolution professional must undertake the following actions:

·      Take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;

·      Represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;

·      Raise interim finances subject to the approval of the committee of creditors wherever required;

·      Appoint accountants, legal or other professionals in the manner as specified
by Board;

·      Maintain an updated list of claims;

·      Convene and attend all meetings of the committee of creditors;

·      Prepare the information memorandum as discussed above;

·      Invite prospective lenders, investors, and any other persons to put forward resolution plans;

·      Present all resolution plans at the meetings of the committee of creditors;

·      File application for avoidance of transactions in accordance with Chapter III, if any; and


·      Such other actions as may be specified by the Board.

Replacement of resolution professional

72.       Where, at any time during the corporate insolvency resolution process, the committee of creditors is of the opinion that a resolution professional appointed by them is required to be replaced, it may replace him with another resolution professional.  However, this decision by committee must be taken at a meeting, by a vote of seventy five per cent of voting shares.  The name of the insolvency professional proposed as replacement shall be forwarded by the committee to the NCLT which shall, in turn, forward the name of the proposed resolution professional to the Board for its confirmation and a resolution professional shall be appointed in the same manner as provided in respect of appointment of interim resolution professional by the Board.  However, if the Board finds any disciplinary proceedings are pending against the proposed resolution professional, the resolution professional appointed earlier shall continue till the appointment of another resolution professional by the Board.

H.        Information memorandum

73.       Another key function of the resolution professional is to prepare an information memorandum in such form and manner, containing such relevant information as may be specified by the Board, for formulating a resolution plan. Relevant information means the information required by the resolution applicant to make the resolution plan for the corporate debtor, which shall include the financial position of the corporate debtor, all information related to disputes by or against the corporate debtor and any other matter pertaining to the corporate debtor as may be specified.  Resolution applicant means any person who submits a resolution plan to
the resolution professional.  The resolution applicant is to be provided access by resolution professional to all relevant information in physical and electronic form, provided such resolution applicant undertakes:

·      To comply with provisions of law for the time being in force relating to confidentiality and insider trading;

·      To protect any intellectual property of the corporate debtor it may have access to; and

·      Not to share relevant information with third parties unless prescribed compliances are made.

I.          Resolution Plan

74.       A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum.  A resolution plan means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern in accordance with Part II of the Code. As already mentioned, a resolution applicant means any person who submits a resolution plan to
the resolution professional

Provisions of resolution plan

75.       The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan:

·      Provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;

·      Provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53 of the Code;

·      Provides for the management of the affairs of the corporate debtor after approval of the resolution plan;

·      The implementation and supervision of the resolution plan;


·      Does not contravene any of the provisions of the law for the time being in force; and

·      Conforms to such other requirements as may be specified by the Board.

Approval of resolution plan by creditors

76.       A resolution plan, which confirms the conditions referred above, must be placed before the committee of creditors by the resolution professional for its approval.  The committee of creditors may approve a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors. The resolution applicant may attend the meeting of the committee of creditors in  which the resolution plan of the applicant is considered. However, the resolution applicant shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor.

Approval of plan by the NCLT

77.       The resolution plan as approved by the committee of creditors must be presented by resolution professional to the NCLT for approval. If NCLT is satisfied that the resolution plan as approved
by the committee of creditors meets the requirements of resolution plan referred above (sub-section (2) of section 30), it shall, by order, approve the resolution plan. The resolution plan approved by the NCLT shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

78.       As a consequence of the order of approval, the moratorium order passed by the NCLT shall cease to have effect. 

79.       Following the order of approval of resolution plan by NCLT, the resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database.

Rejection of resolution plan

80.       If the NCLT is satisfied that the resolution plan does not confirm to the requirements (of sub-section (2) of section 30), it may, by an order, reject the resolution plan.

Punishment for contravention of resolution plan

81.       If a corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding under section 31, knowingly and wilfully contravenes any of the terms of such resolution plan or abets such contravention, such corporate debtor, officer, creditor or person shall be punishable with imprisonment of not less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

J.          Time limit for completion of insolvency resolution process

82.       The corporate insolvency resolution process provided in Chapter II must be completed within a period of 180 days from the date of admission of the application to initiate such process (effective date).  The period of 180 days can be extended by the NCLT upto a maximum period of 90 days.   Therefore, the total period for resolution of corporate insolvency, including extended period, can be upto a maximum of 270 days.  An extension can be granted by the NCLT on an application filed by the resolution professional only if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five percent of the voting shares, and if it is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within 180 days.

83.       Any extension of the period of corporate insolvency resolution process cannot be granted more than once.  Does this mean that if an extension of 30 days is granted in the first instance, no further extension can be granted even though the maximum period for extension can be upto 90 days.

K.        Fraudulent or malicious proceedings

84.       If, any person initiates the insolvency resolution process fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the NCLT may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

L.         Fraudulent or wrongful trading 

85.       If during the corporate insolvency resolution process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, then, on the application of the resolution professional, the NCLT may pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

86.       On an application made by a resolution professional during the corporate insolvency resolution process, the NCLT may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if:

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such  corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. A director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by
such director or partner, as the case may be, in relation to the corporate debtor.

87.       To give effect to its order the NCLT may provide for the liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the corporate debtor held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf; and from time to time, make such further directions as may be necessary for enforcing any charge imposed under this section. 

88.       In relation to a person who is a creditor of the corporate debtor, the NCLT may, by an order, direct that the whole or any part of any debt owed by the corporate debtor to that person and any interest thereon shall rank in the order of priority of payment under section 53 after all other debts owed by the corporate debtor.

M.        Preferential transactions and relevant time

89.       If the resolution professional is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions to any persons, he shall apply to the NCLT for avoidance of preferential transactions and for, passing of other orders.  A corporate debtor is deemed to have given a preference, if such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property; and such transfer has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 (distribution of proceeds).

90.       A preference does not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; any transfer creating a security interest in property acquired by the corporate debtor to the extent that (i) such security interest secures new value[10] and was given at the time of or property; and after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property. Any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.

Relevant time

91.       A preference shall be deemed to be given at a relevant time, if
 (a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.

Orders in case of preferential transactions

92.       The NCLT may, on an application made by the resolution professional:

§  Require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;

§  Require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;

§  Release or discharge (in whole or in part) of any security interest created by the corporate debtor;

§  Require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the resolution professional, as the NCLT may direct;

§  Direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the NCLT deems appropriate;

§  Direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and

§  Direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference.

93.       An order by the NCLT must not (a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the resolution professional.  Where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference,  (i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party, 
it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.

N.        Avoidance of undervalued transactions

94.       If the resolution professional, on an examination of the transactions of the corporate debtor referred to in sub-section (2) of section 43 determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the NCLT to declare such transactions as void and reverse the effect of such transaction in accordance with Chapter III.  A transaction shall be considered undervalued where the corporate debtor makes a gift to a person; or enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.

Relevant period for avoidable transactions

95.       Where a resolution professional makes an application for avoiding a transaction at undervalue, he shall demonstrate that —

§  Such transaction was made with any person within the period of one year preceding the insolvency commencement date; or

§  Such transaction was made with a related party within the period of two years preceding the insolvency commencement date.

96.       NCLT may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.

Application by creditor in cases of undervalued transactions

97.       Where an undervalued transaction has taken place and the resolution professional has not reported it to the NCLT, a creditor, member or a partner of a corporate debtor, as the case may be, may make an application to the NCLT to declare such transactions void and reverse their effect in accordance with Chapter III.  If the NCLT is satisfied that
(a) undervalued transactions had occurred; and (b) liquidator or the resolution professional, as the case may be, after having sufficient information or opportunity to avail information of such transactions did not report such transaction to the NCLT, it shall pass an order (a) restoring the position as it existed before such transactions and reversing the effects thereof in the manner as laid down in section 45 and section 48; (b) requiring the Board to initiate disciplinary proceedings against the resolution professional.

Order in cases of undervalued transactions

98.       The order of NCLT may (a) require any property transferred as part of the transaction, to be vested in the corporate debtor; (b) release or discharge (in whole or in part) any security interest granted by the corporate debtor; (c) require any person to pay such sums, in respect of benefits received by such person, to the liquidator, as the NCLT may direct; or (d) require the payment of such consideration for the transaction as may be determined by an independent expert.

O.        Transaction defrauding creditors

99.       Where the corporate debtor has entered into an undervalued transaction and the NCLT is satisfied that such transaction was deliberately entered into by such corporate debtor (a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or (b) in order to adversely affect the interests of such a person in relation to the claim, the NCLT can make an order (i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and (ii) protecting the interests of persons who are victims of such transactions:

100.    Any such order by the NCLT shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.

P.         Extortionate credit transactions

101.    Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator may make an application for avoidance of such transaction to the NCLT if the terms of such transaction required exorbitant payments to be made by the corporate debtor. The Board may specify the circumstances in which a transaction shall be covered under this category. Any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt, shall in no event be considered as an extortionate credit transaction.

Orders of adjudicating authority in respect of extortionate credit transactions

102.    Where, after examining the application made, the NCLT is satisfied that the terms of a credit transaction required exorbitant payments to be made by the corporate debtor, it shall, by an order (a) restore the position as it existed prior to such transaction; (b) set aside the whole or part of the debt created on account of the extortionate credit transaction; (c) modify the terms of the transaction; (d) require any person who is, or was, a party to the transaction to repay any amount received by such person; or (e) require any security interest that was created as part of the extortionate credit transaction to be relinquished in favour of the resolution professional.

Q.        Other offences and penalties

103.    If any officer of the corporate debtor, within the 12 months immediately preceding the insolvency commencement date is found to have committed any of the following offences, he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both:

§  wilfully concealed any property or part of such property of the corporate 40 debtor or concealed any debt due to, or from, the corporate debtor, of the value
of ten thousand rupees or more; or

§  fraudulently removed any part of the property of the corporate debtor of the value of ten thousand rupees or more; or

§  wilfully concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the property of the corporate debtor or its affairs, or

§  wilfully made any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairs, or

§  fraudulently parted with, altered or made any omission in any document affecting or relating to the property of the corporate debtor or its affairs; or

§  wilfully created any security interest over, transferred or disposed of any property of the corporate debtor which has been obtained on credit and has not been paid for unless such creation , transfer or disposal was in the ordinary course of the business of the corporate debtor; or

§  wilfully concealed the knowledge of the doing by others of any of the 10 acts mentioned in clauses (c) , (d) or clause (e) of sub section (i) of section 68 ; or

§  at any time after the insolvency commencement date, committed any of the acts mentioned in sub-clause (a) to (f) of clause (i) of section 68 or has the knowledge of the doing by others of any of the things mentioned in sub-clauses (c) to (e) of clause (i) of section 68 ; or

§  at any time after the insolvency commencement date, taken in pawn or pledge, or otherwise received the property knowing it to be so secured, transferred or disposed.

104.    A person shall not be liable to any punishment under this section if he proves that he had no intent to defraud or to conceal the state of affairs of the corporate debtor.

105.    If, on or after the insolvency commencement date,  an officer of the corporate debtor or the corporate debtor (a) has made or caused to be made any gift or transfer of, or charge on, or has caused or connived in the execution of a decree or order against, the property of the corporate debtor; (b) has concealed or removed any part of the property of the corporate debtor  within two months before the date of any unsatisfied judgment, decree or order for payment of money obtained against the corporate debtor, such officer of the corporate debtor or the corporate debtor, as the case may be, shall be punishable with imprisonment for a term which shall not be less than one year, but which may extend to five years, or with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both. A person shall not be so punishable if the acts mentioned above (in clause (a) of section 69 were committed more than five years before the insolvency commencement date; or if he proves that, at the time of commission of those acts, he had no intent to defraud the creditors of the corporate debtor.

106.    If, on or after the insolvency commencement date, an officer of the corporate debtor commits any of the following offences he shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to five years, or with fine, which shall not be less than one
lakh rupees, but may extend to one crore rupees, or with both:

§  does not disclose to the resolution professional all the details of property of the corporate debtor, and details of transactions thereof, or any such other information as the resolution professional may require; or

§  does not deliver to the resolution professional all or part of the property of the corporate debtor in his control or custody and which he is required to deliver; or

§  does not deliver to the resolution professional all books and papers in his control or custody belonging to the corporate debtor and which he is required to deliver; or

§  fails to inform there solution professional the information in his knowledge that a debt has been falsely proved by any person during the corporate insolvency resolution process; or

§  prevents the production of any book or paper affecting or relating to the property or affairs of the corporate debtor; or

§  accounts for any part of the property of the corporate debtor by fictitious losses or expenses, or if he has so attempted at any meeting of the creditors of the  corporate debtor within the twelve months immediately preceding the insolvency commencement date,

107.    A person shall not be liable to punishment for above offences if he proves that he had no intent to do so in relation to the state of affairs of the corporate debtor.

108.    If, on and after the insolvency commencement date, any person destroys, mutilates, alters or falsifies any books, papers or securities, or makes or is in
the knowledge of making of any false or fraudulent entry in any register, book of account or document belonging to the corporate debtor with intent to defraud or deceive
any person, he shall be punishable with imprisonment for a term which shall not
be less than three years, but which may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

109.    Where an officer of the corporate debtor makes any material and wilful omission in
any statement relating to the affairs of the corporate debtor, he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

110.    If any officer of the corporate debtor (a) on or after the insolvency commencement date, makes a false representation
or commits any fraud for the purpose of obtaining the consent of the creditors of the corporate debtor or any of them to an agreement with reference to the affairs of the corporate debtor, during the corporate insolvency resolution process, or the liquidation process; (b) prior to the insolvency commencement date, has made any false representation, or committed any fraud, for that purpose, he shall be punishable with imprisonment for a term which shall not be less than three years, but may extend to five years or with fine which shall not be less than one lakh  rupees, but may extend to one crore rupees, or with both.

R.        Transfer of proceedings of bankruptcy of personal guarantor

111.    When an proceedings for resolution of corporate insolvency are pending in the NCLT, an insolvency resolution process or bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal shall stand transferred to the NCLT dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.

S.         Powers of the NCLT

112.    Notwithstanding anything to the contrary contained in any other law for the time being in force, the NCLT shall have jurisdiction to entertain or dispose of (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the Code.

T.        Appeal

Appeal before the National Company Law Appellate Tribunal

113.    An appeal by a person aggrieved by an order approving the resolution plan by the NCLT may be filed before the National Company Law Appellate Tribunal (hereinafter referred to as the NCLAT) on the following grounds:

§  The approved resolution plan is in contravention of the provisions of any law for the time being in force;

§  There has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;

§  The debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;

§  The insolvency resolution process costs have not been provided for repayment in priority to all other debts; or

§  The resolution plan does not comply with any other criteria specified by the Board.

114.    Every such appeal shall be filed within 30 days. The NCLAT may allow an appeal to be filed after the expiry of the said period of 30 days if it is satisfied that there was sufficient cause for not filing the appeal but such period shall not exceed 15 days.

Appeal before Supreme Court of India

115.    Any person aggrieved by an order of the NCLAT may file an appeal to the Supreme Court on a question of law arising out of such order under the Code within 45 days from the date of receipt of such order.  The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within 45 days, allow the appeal to be filed within a further period not exceeding 15 days.

U.        Civil court not to have jurisdiction

116.    No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which the NCLT or the NCLAT has jurisdiction under the Code.  No injunction can be granted by any court, tribunal or authority in respect of any action taken, or to be taken in pursuance of any power conferred on the NCLT or the NCLAT under the Code.

V.        Fast track corporate insolvency resolution process

117.    The Code provides for a fast track corporate insolvency resolution process to be completed within a period of ninety days from the insolvency commencement date. The period of 90 days may be extended by a maximum period of 45 days by the NCLT on an application filed by resolution professional. The resolution professional can make such application for extension on if instructed to do so by a resolution passed at a meeting of the committee of creditors and supported by a vote of seventy five percent of the voting share. Any extension of the fast track corporate insolvency resolution process can be granted by the NCLT only once.

Cases where application for fast track may be made

118.    An application for fast track corporate insolvency resolution process may be made in respect of a corporate debtor with assets and income below a level as may be notified by the central government; or a corporate debtor with such class of creditors or such amount of debt as may be notified by the central government; or such other category of corporate persons as may be notified by the central government.

Who can file an application for fast track?

119.    An application for fast track corporate insolvency resolution process may be filed by a creditor or corporate debtor.  Any such application shall be accompanied with (a) the proof of the existence of default as evidenced by records available with
an information utility or such other means as may be specified by the Board; and  (b) such other information as may be specified by the Board to establish that the corporate debtor is eligible for fast track corporate insolvency resolution process.

Manner of initiating fast track corporate insolvency resolution process

120.    The process for conducting a fast track corporate insolvency resolution process and the provisions relating to offences and penalties are the same as applicable in case of normal corporate insolvency resolution process as the context may require.

  

Recommended reading List

1.              UNCITRAL Legislative Guide on Insolvency

2.              Report of Bankruptcy Law Reform Commission

3.              Insolvency and Bankruptcy Code, 2016

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[1] Sub section (12) of section 3 of the Code

[2] Sub section (11) of section 3 of the Code

[3] Para 23, Page 46, UNCITRAL Legislative Guide on Insolvency Law

[4] Sub section (6) of section 3 of the Code

[5] Sub section (8) of section 5 of the Code

[6] Sub section (21) of section 5 of the Code

[7] Established under sub section (1) of section 188 of the Code

[8] Chapter V of the Code

[9] Para 26, Page 83, UNCITRAL Legislative Guide on Insolvency Law

[10] “New value" means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under the Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.