STUDY like a STAR: CS Professional:Insolvency-Law & Practice [Ch-3 Corporate insolvency Resolution Process:CIRP]

Part II-IBC,2016 : CORPORATE PERSONS

Section 4

provides that Part II shall apply to corporate person insolvency/liquidation where minimum default is 1 crore; lays down following independent stages:

CIRP (Section 6-32A):financial creditors assess the viability of debtor’s business and the options for its revival and rehabilitation;Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 defines it.(CH II,VII of Part II)
liquidation (33-54) and voluntary liquidation (Section 59):assets of the debtor are realised and distributed by the liquidator

Section 6

where any corporate debtor commits default,the following may initiate CIRP under Ch II of Part II:

"default" means non-payment of debt when it becomes due/payable [3(12)].

IBC defines:

[5(7)] FINANCIAL CREDITOR: to whom a financial debt is owed and includes legally assigned/transferred debts

[5(8)] FINANCIAL DEBTS: debt+interest disbursed against consideration for time value of money and includes

The (Second Amendment) Act of 2018 added an explanation in sub clause (f) of section 5(8) to include an allottee under a real estate project.Hon’ble Supreme Court of India has upheld the above stated legal position in the matter of Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. dated 09.08.2019. and ‘Manish Kumar & Ors. Vs. Union of India & anr.

[5(20)] OPERATIONAL CREDITOR: to whom operational debt is owed and includes legally assigned/transferred

[5(21)] OPERATIONAL DEBT: claim w.r.t goods or services including employment or legally arising dues payable to govt./local authority

simple default-based test to initiate process permitting early intervention in financial distress for timely resolution of insolvency
IBC permits operational creditor and corporate debtor itself to initiate CIRP bringing it in line with international practices which permit unsecured creditors

Section 7 : INITIATION BY FINANCIAL CREDITORS

[7(1)]1/more financial creditors themselves [(or on their behalf) IBC (second amendment) act,2018] file an application before AA when the default has occurred.

for financial creditors mentioned in 21(6A)(a,b);application shall be filed by not less than 100 creditors in the same class/not less than 10% of total creditors,whichever is LESS.
financial creditors=allottees for real estate project,eligibility same as above

EXPLANATION TO 7(1) default includes w.r.t financial debt not only to applicants but to other financial creditors.
AA=NCLT (National Co. Law Tribunal)

[7(2)]such form/fee as prescribed
[7(3)]along app furnish:

The default record with the IU/other evidence as specified to prove app isn't frivolous (filed with all new petitions;dated 12/05/2020)
proposed (RP) Resolution Professional to act as Interim/IRP
other board specified info

AA shall within 14 days (discretionary not mandatory,Surendra trading Company v. Juggilal Kamlapat Jute Mills Company limited and Others) of app receipt under (2) ascertain default existence from evidence under (3); if no existence of default and passed order under (5),then record reasons in writing for it.
[7(5)]where AA satisfied:

default occurred and app under (2) is complete/no disciplinary proceedings pending against proposed RP,order to admit app

not required to look into another criteria

default has not occured and app (2) is incomplete/any disciplinary proceedings pending,order to reject such app
AA shall before rejecting apps under (5)(b) give notice to applicant to rectify the defect within 7 days of receipt of notice from AA

[7(6)]CIRP commences from admission of app under (5)
AA shall communicate order:

prior to IBC (amendment) Ordinance,2019,single deposit/debenture holder/home buyer was entitled to file an app which led to multiple suits
FILE FORM 1 WITH NCLT

Section 8 : INSOLVENCY RESOLUTION BY OPERATIONAL CREDITORS (OC)

lays down procedure for initiating CIRP by OC as it tends to be of smaller recurring amounts,possibility of disputed debt also higher and not prematurely putting it into CIRP for extraneous considerations. also facilitates informal negotiations resulting in debt restructuring.

[8(1)]deliver a demand notice of unpaid operational debt/invoice copy demanding payment as prescribed

"demand notice"notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

[8(2)]corporate debtor within 10 days of receipt under (1) bring to OC's notice:

existence of a dispute/record of pending suit//arbitration proceedings filed before receipt of notice/invoice relating to dispute
payment of unpaid operational debt-

sending attested record copy of electronic transfer
encashed cheque copy

Section 9 : CIRP application by OC

[9(1)]after expiry of 10 days from notice/invoice delivery under 8(1),if OC doesn't get evidence under 8(2), file application initiates CIRP
such form and manner as prescribed: FORM 5

amended by second amendment 2018, 9(3)(c) is optional and (d,e) are additional

OC to propose an IRP
AA (NCLT), within 14 days of app receipt shall be ordered:

[9(5)]admittance and communicate it to OC/debtor if,-

reject and communicate to OC/debtor if,-

AA shall before rejecting notify appellant to rectify the defected app within 7 days of notice receipt
[9(6)]same as 7(6)

Section 10 : INITIATION BY CORPORATE DEBTOR/VOLUNTARY

if defaulted (not inability to pay debts),corporate applicant may file to app with AA for initiating CIRP

[5(5)] CORPORATE APPLICANT:

corporate debtor
member or partner of the corporate debtor who is authorised to make an application under the constitutional document
individual who is in charge of managing the operations and resources
person who has the control, and supervision over the financial affairs

they are allowed to file apps as they are likely to have best info about financial affairs and it would ensure timely intervention for CIRP

filed such form/manner/fee as prescribed: FORM 6
[10(3)]along app may furnish:

info relating to books of accounts and such others for such period as prescribed
proposed IRP info
SR passed by at least 3/4th of total partners approving app filing (second amendment act,2018)

[10(4)]AA shall within 14 days of app receipt, order to admit/reject app as above in 7(5)
same as 7(6)
[10A] inserted vide IBC (amendment) ordinance,2020 w.e.f. 05/06/2020 in light of covid-19 pandemic

no app for CIRP due to covid-19 on/after 25/03/2020 for 6 months-1 year but prior defaults are enforceable

Section 11 : PERSONS INELIGIBLE TO MAKE APP

The second explanation clarifies that one corporate debtor can initiate CIRP against another [IBC (amendment) ordinance,2019]

clause (a,b) ensure there are no CIRP recourses to keep assets out of creditor's reach

whereas (c) ensures no extraneous considerations + ensuring compliance with the resolution plan and (d) ensures the finality of liquidation order.

Section 12 : TIME LIMIT FOR COMPLETING CIRP

[12(1)]completed within 180 days of CIRP commencement subject to (2)
[12(2)]RP shall file an app to AA to extend CIRP beyond 180 days if resolved by 66% of creditors committee
[12(3)]if AA satisfied CIRP can't be completed within 180,order extension by further period as it thinks fit not exceeding 90 days

shall not be granted more than once
mandatorily completed within 330 days from insolvency commencement including extension and time for legal proceedings

well defined time limit to ensure commercially unviable debtors are not kept in process for too long and are liquidated at earliest opportunity

reduce cost to creditors and avoid value depletion
enable swift promoter exist

[5(28)] VOTING SHARE:share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed
[12A] added by second amendment act,2018,AA may allow app withdrawal with approval of 90% creditors committee as specified before admission

permit withdrawal of the application on the request of the applicant under rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
Form FA given under Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is required to be filed for withdrawal

Section 13 : NCLT ACTIONS AFTER APP ADMITTED

[13(2)] public announcement in 13(1)(b) made immediately after Interim RP appointment

explanation to regulation 6(1) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 prescribes that immediately means three days from the date of his appointment.

Section 14 : MORATORIUM

subject to (2,3), on insolvency commencement, AA declares moratorium for prohibiting:

suit institution/continuation against the debtor including executing judgement/decree/order under any authority
transferring/encumbering/alienating/disposing any assets/legal rights/beneficial interest
action to foreclose/recover/enforce security created by the debtor including any action under SARFAESI act,2002
property recovery if occupied/possessed by debtor

EXPLANATION: no licence, permit, registration, quota, concession, clearance or similar grant/right shall be suspended on grounds of insolvency subject to no default to payment of current dues for continued use [inserted vide (amendment) ordinance,2019].

[14(2)]supply of essential goods or services shall not be terminated/ censored/ interrupted

[14(2a)]where Interim RP considers supply critical to protect and preserve the debtor and manage operations, shall be considered essential except where arising dues from such supply are not paid. [inserted vide (amendment) ordinance,2019].
costs of such goods shall be prioritised over other costs in resolution plan/asset distribution

[14(3)]14(1) doesn't apply to transactions notified by govt./regulators for smooth functioning of financial markets[inserted vide (amendment) ordinance,2019].

surety in a guarantee contract to a debtor

[14(4)]moratorium order effected from order till CIRP completion

if AA approves resolution plan under 31(1) during CIRP or passes liquidation order under 33,the moratorium shall cease to have effect from order approval; whichever is EARLIER.

Moratorium Declaration serves the following purposes:

ensures multiple proceedings not taking place simultaneously and avoids potentially conflicting outcomes
keeps assets together and facilitates orderly completion
ensures the company may continue as a going concern while creditors assess resolution option
prohibition on asset disposal keeping value intact

Section 15 : CIRP PUBLIC ANNOUNCEMENT

shall contain the following particulars:

Debtor's name/address
incorporating/registering authority
last date for claim submission
details of Interim RP
penalties for misleading/false claims
date of CIRP closing=180th day from admission of CIRP app under Section 7,9 or 10.

Section 16 : INTERIM RP APPOINTMENT/TENURE

[16(1)]AA shall appoint IRP on insolvency commencement ensuring no delays in CIRP/management leaving no room for directors/promoters to act fraudulently during insolvency.
[16(2)]if an app is made by a financial creditor/debtor himself under Section 7 or 10, then the proposed appointed as RP, if no disciplinary proceedings are pending against them.
[16(3)]if the app is made by OC and:

no proposal for Interim made,AA refers to board for recommending an Interim
if the proposal was made under 9(4),the proposed appointed as Interim RP,if no disciplinary pending against them

[16(4)]board shall within 10 days of reference,recommend an IP to AA against whom no disciplinary proceedings are pending
[16(5)]The term of Interim continues till the appointment of RP under 22 [inserted vide (second amendment) Act,2018] ensuring business is always under IRP/RP supervision

Section 17 : DEBTOR'S AFFAIR MANAGEMENT BY INTERIM RP/ POWERS OF IRP

[17(1)] prides that from appointment of Interim:

affair mgmt. shall vest in interim
board/partner powers stand suspended and exercised by Interim
officers/managers shall report to Interim RP and provide required access
FI maintaining accounts shall act on Interim RP's instructions and furnish info as required

[17(2)] Interim shall have powers to:

act/execute deeds,receipts and other docs
take actions as specified by board
have access to electronic records from IUs
authority to access books/records and other relevant docs available with auditors and accountants
responsible for complying with law for effective discharging of responsibilities [inserted vide (second amendment) Act,2018].

Section 17 inserted keeping in mind the debtor-in-possession regime under sick industries act,1985 which was analysed to be a fatal flaw

DUTIES OF IRP

collect all info relating to assets/finances and operations for determining financial position including:

business operations for the previous 2 years
financial/operational payments
assets/liabilities @ initiation
such other matters as specified

receive/collate all claims submitted by creditors pursuant to public announcement
constitute a creditors committee
monitor assets/manage operations until RP appointed by committee
file info collected with IU,if necessary
take control/custody of asset over which debtor has ownership right as in the balance sheet including:

located in foreign country
assets may/may not be in possession
tangible assets
intangible assets
securities including shares in subsidiary/FI/insurance policies
assets subject to ownership determination by court/authority

perform board-specified duties

Section 18 specifies assets that can't be taken over/"assets" shall not include:

owned by a third party possessed by the debtor held under trust/contractual arrangements including bailment
assets of subsidiary
others as notified by CG consulting with regulator

RP not only required to give meeting notice to CoC members,but also to suspended board members/partners.

OCs/representatives are also informed to attend meetings, aggregate dues not less than 10% debt.

Section 19(1) : PERSONNEL TO EXTEND COOPERATION TO INTERIM RP

[19(2)] if cooperation is not extended, Interim may apply to AA for an order

[19(3)]to direct compliance/provide info

[5(23)] personnel includes directors/managers/KMPs/designated partners and employees

Section 20 : OPERATIONS MANAGEMENT AS A GOING CONCERN

[20(1)]Interim RP manages operations as a going concern to protect and preserve property value
shall have the authority to:

[5(15)] INTERIM FINANCE=financial debt raised and other debt notified raised during CIRP [inserted vide (amendment) Ordinance,2019] widening the term interim finance

[5(13)]cost incurred in raising such finance included in CIRP cost,i.e. paid @ priority at liquidation

5(13) inserted as it is extremely difficult to obtain credit because lenders are hesitant to lend to a troubled debtor

Section 22 : RP APPOINTMENT

The main function of the creditors committee (CoC,constituted under Section 21) is RP appointment

[22(1,2)] first CoC meeting held within 7 days of constitution and by majority of 66%/more either resolve to appoint Interim OR to replace Interim by another

[22(3)(a)]if CoC resolves to continue with Interim,communicating such to Interim,debtor and AA

subject to written consent from Interim in Form AA
[inserted vide (second amendment) Act,2018]

[22(3)(b)]if CoC resolves to replace Interim,file an app before AA along with written consent from proposed in specified form

[22(4)] AA forwards (3)(b)'s name to board for their confirmation and appointment
[22(5)] if board doesn't confirm in (4) within 10 days of receipt,AA shall direct Interim to continue until board confirms appointment

Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lays down the following eligibility criteria for a resolution professional:

if he and all partners/directors of his professional entity are independent of debtor

independent if:

RP shall make disclosures at appointments in accordance with code of conduct
RP who is a director/partner shall not continue as IRP if entity/partner/director represent any other stakeholders in same CIRP

Section 23 : RP to conduct CIRP

responsible for carrying out entire CIRP and managing operations,for these exercise powers and perform duties as vested in chapter II part II of this code.

Subject to Section 27,continue managing operations after CIRP until a resolution plan is approved/liquidator appointed
exercise powers and duties as vested on Interim
in case appointment under 22(4), interim to provide all docs and records to RP

Section 25 : RP DUTIES

[25(1)]to preserve/protect business assets including continued business operation and lays down functions

[25(2)] undertake the following:

also empowered to raise interim finance with prior approval of CoC and will be part of "IRP costs"

clause (h) [inserted vide (second amendment) Act,2018]

Committee of Creditors (CoC)

typically consists of financial creditors,supreme decision-making body in CIRP

decisions regarding admin taken at CoC based on a requisite vote and giving approval to IRP/RP

Section 21:

[21(1)]IRP shall after claim collation and determination of financial position,constitute CoC
[21(2)]comprise of all financial creditors to assess commercial viability and to modify debt contracts

case law for related parties:‘Phoenix Arc Private Limited Vs. Spade Financial Services Limited & Ors.’
[1st proviso]if a related party, shall not have the right to represent,participate or vote
relatedness of the past must also be considered
not applicable to financial creditors,regulated by a financial sector regulator or related party on account of conversion/debt substitution into equity or instrument convertible into equity or completion prior to insolvency commencement.[inserted vide (second amendment) Act,2018]

[3(18)] FINANCIAL SECTOR REGULATOR

[21(3)]subject to (6,6A), debtors owe financial debts to 2/more financial creditors as part of consortium/arrangement,each such creditor to be part of CoC and voting share determined upon financial debts owed by them.
[21(4)]where the person is FC & OC,

FC to the extent of financial debt and proportionately included in CoC
OC to the extent of operational debt
Swiss Ribbon Pvt. Ltd. & Anr. v. Union of India & Ors. (date of judgment 25.01.2019)
[5(28)] VOTING SHARE

[21(5)]where OC has assigned/legally transferred operational debt to FC,he shall be considered an OC to the extent of such assignment
[21(6)]terms of financial debt extended by part of consortium arrangement/syndicated facility for a single trustee/agent,each FC may:

authorise to act on behalf
represent himself in CoC
appoint an IP at own cost to represent himself
exercise right to vote to the extent of voting share
(6A)where a financial debt in the form of:

securities/deposits and terms provided for appointment
owed to class (at least 10 FCs) exceeding number as specified
represented by guardian/executor/administrator

[inserted vide (second amendment) Act,2018]

(6B)remuneration payable:

if owed to a class, part of IRP cost
otherwise as per terms of debt/doc
[3(13)] FINANCIAL INFO

board may specify voting manner/determining voting share w.r.t (6A,B)
[21(8)]all committee decisions taken by 51%/more votes
[21(9)]committee has the right to require RP to furnish any financial info anytime during CIRP
[21(10)]RP shall make available any financial info required by CoC under (9) within 7 days of such requisition

[5(13)] IRP COST

[3(6)] CLAIM

right to payment, whether or not such a right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured
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

CoC OF OCs

Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 deals with situations where either the corporate debtor has no financial debt or all FCs are related parties.
consisting of:

voting right proportionate to debt
same rights as FC CoC

REGULATION 16B: only creditors and no FCs eligible,consist of only the authorized representatives (notification dated:03/07/2018)
REGULATION 16A: authorized representatives
fee

Section 24 : CoC MEETING

[24(1)]in person/electronically as specified
[24(2)] all meetings conducted by RP
(3) RP shall give meeting notice to:

members including authorized representatives
members of suspended board/partners
OCs/representatives if their aggregate dues not less than 10% of debt

[24(4)] above may attend but shall have no right to vote and absence shall not invalidate proceedings
[24(5)] any committee creditor may appoint an IP and fees borne by such creditor
(6) each creditor to vote according to voting share
(7) RP to determine voting share as specified by board
(8) meetings conducted as specified

MEETING NOTICE: not less than 5 days notice in writing to every participant electronically

CoC may reduce it to not less than 24 hours/48 hours if there is a representative (Regulation 19)
inform venue,date and time and video conferencing option
RP to be informed in advance of representative's identity
consisting of:

matters to be discussed
issues to be voted upon
copies of all relevant docs
voting process/manner electronically

Section 25A [inserted vide (second amendment) Act,2018] RIGHTS/DUTIES OF AUTHORISED REPRESENTATIVES

Section 27 : RP REPLACEMENT BY CoC

replaced anytime during CIRP by 66% votes of CoC if suspected collusion between RP and debtor/mgmt.

If the committee feels the need to replace RP appointed under 22,It may do so with another resolution
[27(2)]CoC may replace existing by 66% votes subject to written consent from proposed RP in specified form [inserted vide (second amendment) Act,2018]

CoC shall forward proposed RP's name to AA
AA shall forward to board for confirmation and appointment in 16
if disciplinary proceedings pending against under professional under (3) above, existing shall continue till appointment of another

Section 29 : INFO MEMORANDUM PREPARATION

Section 29 read with Regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lays down the preparation of an information memorandum as one of the main functions of RP.
prepared for resolution applicants (market participants) to provide insolvency resolutions

[5(25)] RESOLUTION APPLICANT:who submits a resolution plan pursuant to an invitation under [25(2)(h)]
[inserted vide (second amendment) Act,2018]

[29(1)] such form/manner/relevant info as specified by board
[29(2)] RP shall provide all relevant info to the applicant, provided the applicant undertakes to:

comply with law relating to confidentiality/insider trading
protect intellectual property
not to share info with 3rd parties unless above conditions complied

R 36: subject to sub-regulation (4), RP submits info memo within 2 weeks of appointment but not later than 54th day from insolvency commencement, whichever is EARLIER.

it contains the following:

committee members may request for further info and RP shall provide such within reasonable time if it has a bearing on resolution plan
share info memo after receiving undertaking from member(s) to maintain confidentiality/not cause undue gain or loss and comply with 29(2)

Section 28 : CoC APPROVAL FOR CERTAIN ACTIONS

approval by 66% vote to secure committee consent for specific matters; if action taken without approval, VOID and RP liable to be replaced.

[28(1)] notwithstanding another law, these must require approval of CoC:

[28(2)] RP shall convene a meeting to take approval prior to acting
[28(3)] no action approved until 66% [inserted vide (second amendment) Act,2018]
(4) action without approval is VOID
(5) CoC may report RP's action to board for necessary action

REGULATION 25 covers voting provisions

28(1) considered in meetings
RP to take vote of present members after discussion
at conclusion,RP to announce the decision along with members who voted for/against/ abstained from voting
RP shall:

circulate minutes electronically to all members/authorized representative within 48 hours of conclusion
seek votes who didn't vote electronically according to reg. 26 where voting kept open at least 24 hours from circulation

authorized representatives shall circulate minutes and announce the voting window at least 24 hours before it opens and keep open for at least 12 hours

Reg. 39 provides resolution approval by CoC

SPECIAL TIMELINE RELATED PROVISIONS

Regulation 40A/C of IBBI (CIRP) regulations,2016

IMPORTANT CASE LAWS

A lawyer can issue demand notice on OC's behalf:Macquarie Bank Limited v. Shilpi Cable Technologies Ltd
corporate debtors can't maintain appeal:Radius Infratel Pvt. Ltd. …Appellant v. Union Bank of India, the National Company law appellate tribunal (NCLAT) has reiterated Supreme Court’s decision in the landmark case Innoventive Industries Ltd. v. ICICI Bank and Ors
flat buyers can initiate IRP against builders:

Nikhil Mehta & Sons (HUF) & Ors. v. AMR Infrastructures Ltd.
Pioneer Urban Land and Infrastructure Ltd. & anr vs. UOI

The time limit for accepting/rejecting a petition is directory, not mandatory:Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and Others
time limit for CIRP completion:Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors
CoC role in CIRP:‘Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & ors.’

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April 28, 2023

CS Professional:Insolvency-Law & Practice [Ch-3 Corporate insolvency Resolution Process:CIRP]