IBC Stands for Insolvency and Bankruptcy Code, 2016 (read with its Regulations). The Insolvency and Bankruptcy Code is being regulated by Insolvency and Bankruptcy Board of India (IBBI). This law was notified in 2016 subsuming earlier laws and regulations which used to deal with insolvency, while replacing BIFR, SICA etc.
Where an amount of 1,00,00,000 (INR One Crore) or more is in default by Body Corporate (i.e. Companies or LLP), then the Creditor on whose the default has been committed can initiate the proceedings against the Body Corporate. Debt in Default specifically means a Body Corporate is unable to pay its dues to its creditors.
Further in case of default, the process under Insolvency and Bankruptcy would be of two fold
The Liquidation process is followed by a failed CIRP process only. CIRP process can be initiated by the following
Brief comparison different processes undertaken as per IBC are as follows:
| Points of Difference | CIRP | Liquidation | Voluntary Liquidation |
|---|---|---|---|
| Governance | IBC, 2016 (Part II, Chapter I) and IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 | IBC, 2016 (Part II, Chapter III) and IBBI (Liquidation Process) Regulations, 2016 | IBC, 2016 (Part II, Chapter V) and IBBI (Voluntary Liquidation Process) Regulations, 2017 |
| Default on payments | Yes | Yes | No |
| Purpose | Resolve the debts and seek revival of company, saving the enterprise and its value through restructuring with existing or new management | Normally Fallout of failed resolution. Purpose is to recover value from the assets of the company and distribute among its creditors | A voluntary decision of existing management to close its operations and dissolve the company subject to no defaults and with commitment to fulfill all external liabilities |
| Initiation | Through an order of Adjudicating Authority i.e. NCLT based on the petition of Financial Creditors, Operational Creditors or by the company itself. | Requires an order of Adjudicating Authority i.e. NCLT. Decision for liquidation can be taken by COC or NCLT or Completion of CIRP timelines and no resolution for the company is achieved | By the Shareholders of the company post assurance on solvency from the management of the company. Order of Adjudicating Authority is not required |
| Moratorium | Yes | Yes | No |
| Position of Management | Powers of the Board of Directors are Suspended. Directors can attend the COC meetings but have no voting power | Normally Liquidation order discharges the Directors/ KMPs/ Management and Employees and all powers vests in Liquidator. Directors can attend the SCC meetings but have no voting power | Management continues to be active providing adequate support to the operations and management of Voluntary Liquidation process. |
| Claims from Creditors | Invited, Collated and Verified | Invited, Collated and Verified | Invited, Collated and Verified |
| Appointment of Insolvency Professional as | IRP/ RP | Liquidator | Liquidator |
| Payment Structure | As per Resolution Plan approved by NCLT | As per Section 53 of the Code | As per Section 53 of the Code |
| Timelines | 180 Days with a maximum one time extension of 90 days. The process should be completed in 330 days | The process should be completed within 1 year from Liquidation commencement date | 90 Days – In case the Corporate Person doesn’t require to obtain NOC from its creditors 270 Days – In case the Corporate Person requires to obtain NOC from its creditors |
| Conclusion of the respective process | Through an order of NCLT either approving Resolution Plan or referring the same for Liquidation. | Through an order of NCLT for liquidation of the Company or closing of process (without dissolution) in case of sale as a going concern | Through an order of NCLT for dissolution of the Company. |
The easiest way is to find the corporate debtor under the tab corporate processes available on the website of IBBI i.e. https://ibbi.gov.in/
In case of a listed company, the status details are shared with the exchange also. One can find the same on respective exchange BSE or NSE
The details can further be accessed through the website of particular Corporate Debtor. This is subject to the changes/ alterations made by the IRP/ RP/ Liquidator.
Corporate Debtor – A Body Corporate i.e. a Company or Limited Liability Partnership against whom CIRP or Liquidation process is initiated.
Moratorium – The term per se means a temporary prohibition of an activity. In context of IBC, moratorium means prohibition on any activity which has a negative impact or reduction in the value of assets of the Corporate Debtor. This means that any recovery, enforcement of security interest or institution or continuation of any suit or pending suits are prohibited. (For detailed understanding please refer to Section 14 of the IBC).
Financial Creditors – Debt due or amount recoverable for a Financial debt or Commitment example Loan, Advance or Guarantee etc. provided. In other words where money was paid/ promised to be paid or on behalf of a Corporate Debtor, then the resultant amount due from the Corporate Debtor would be Financial debt and the person to whom the amount owed is Financial Creditor.
Financial Creditors includes Homebuyers as a Class of Creditors (who have paid money to secure a flat/ shop/ land parcel etc.) against advance payment of money and Deposit Holders who have put in money in exchange of a debt document, for example Debentures, Fixed Deposit holders.
| Initiation of CIRP | Under Section 7 (No Demand Notice required) |
|---|---|
| Claim Form under CIRP | Form C |
| Claim Form under Liquidation | Form D |
| COC Participation | Yes with voting share proportional to the financial debt owed. |
| Additional Coverage in claims | Key point to keep in mind is intention of lender to claim/ recover in normal circumstances. Interest – Allowable, as the financial debts are generally being provided with Interest. The same also should be captured in the documentation. Penalty & Charges – Not normally allowable, these charges are incidental charges being imposed as per the norms/ documentation or policy decisions. |
Operational Creditors - Debt due or amount recoverable for sale of goods or provision of any service would be Operational Debt. In other words, where the amount is recoverable by a person for some goods sold, work done or services rendered and the amount could not be recovered would be Operational debt and the person to whom the amount owed is Operational Creditor.
Operational Creditor also includes amount due to statutory authorities, employees, workmen and vendor for goods and services.
| Initiation of CIRP | Under Section 9 after providing (Demand Notice u/s 8 of IBC is required) |
|---|---|
| Claim Form under CIRP | Form B |
| Claim Form under Liquidation | Form C |
| COC Participation | Possible, only where the debt owed is more than 10% of total debt size Without voting rights. |
| Additional Coverage in claims | Key point to keep in mind is intention of Operational Creditor to claim/ recover in normal circumstances. Interest, Penalty & Charges – Not normally allowable. |
Creditors in Class/ Class of Creditors – According to IBC law, it means a class with at least ten similarly placed financial creditors, this means homogeneous class of financial creditors. In this category generally Homebuyers, Debenture holders , FD Holders etc. who have provided financial debt under same arrangement/ scheme/ offer are included.
| Initiation of CIRP | Under Section 7 by minimum of - not less than 100 creditors in the same class or - not less than 10% of the total number of such creditors in the same class, |
|---|---|
| Claim Form under CIRP | Form CA |
| Claim Form under Liquidation | Form D |
| COC Participation | Yes with voting share proportional to the financial debt owed. The participation and voting is exercised by Authorized Representative based on the voting structure. In other words, whether the motion would be approved or rejected is decided by simple majority vote among the class and AR casts the vote for entire class as per the decision of majority of the said class of creditors. |
| Additional Coverage in claims | Interest – IBC law specifically allows 8% p.a. or any higher interest rate agreed between parties and so captured in the documentation. Penalty & Charges – Not normally allowable |
Authorized Representative - Authorized Representative (AR) would be appointed in case of class of Creditors. The Interim Resolution Professional while inviting claims through Public Announcement provides names of 3 Insolvency Professionals. Every class of creditor has to choose from name the 3 names provided in the Public Announcement. AR chosen by maximum number of creditors would be appointed as AR for that class of creditors.
Other than class of creditors, any other COC member can also appoint an Insolvency Professional as their Authorized Representative.
Public Announcement – at the beginning of a CIRP or Liquidation process, IRP or Liquidator, as the case maybe respectively publish public announcement in the newspapers, on the website of IBBI and on the website of Corporate Debtor. The easiest way to find the corporate debtor is under the tab corporate processes available on the website of IBBI i.e. https://ibbi.gov.in/
IBBI – Insolvency and Bankruptcy Board of India is the regulator of IBC in India. It was created as the refereeing institution with multiple tasks including creation of regulations and control of agencies and professionals involved in the insolvency and bankruptcy business.
Interim Resolution Professionals (IRP) – Insolvency Professional appointed for first 30 days of resolution process of a Corporate Debtor. Insolvency Professional is appointed as IRP for a Corporate Debtor through the order of NCLT
Resolution Professionals (RP) – The COC may decide to continue with the same IRP as RP or can decide to appoint a new insolvency professional as RP to continue the resolution process of a Corporate Debtor. Only in case of a change of an IRP, the new Insolvency Professional would be appointed as RP through the order of NCLT
Liquidator – Insolvency Professional appointed to liquidate the assets and affairs of the Corporate Debtor is appointed as Liquidator for the Corporate Debtor through the order of NCLT.
Committee of Creditors (COC) – In simple words The IRP based on the claims received from Financial Creditors would form a committee of Financial Creditors and assign voting percentage to the respective financial creditors. Based on their claims to total debt of CD, the COC jointly takes decisions on the issues/ agendas arising during the continuation of CIRP Process. Decisions are taken based on applicable majority percentage of either 66% or 51%, as applicable.
All the decision unless, specifically provided in the Code to be decided through 66% voting shall be decided by 51% voting. Specific material decision which should be decided through 66% are such as, Mandatory actions as per Section 28 of the Code, Replacement of IRP/ RP, Extension of CIRP period etc.
In general only Financial Creditors are part of COC but operational creditor whose debt is more than 10% of the total debt would also be a member of COC but do not get any voting rights.
Other than class of creditors any other COC member can also appoint an Insolvency Professional as their Authorized Representative.
Information Memorandum – As part of the CIRP process the RP is required to invite Resolution Plans for the restructuring of debt owed by the company and hence prepares an Information Memorandum. Information Memorandum is the base document based on which a Prospective Resolution Applicant (PRA) get to know the relevant details of the Corporate Debtor and is able to submit the Resolution Plan.
Resolution Applicant – According to the IBC law, once the RP has assessed the overall health of the Corporate Debtor and collated all the information and claims, S/he is requested to put Expression of Interest (EOI) for submission of Resolution Plan. In the EOI the Resolution Professional places the eligibility criteria for Prospective Resolution Applicant(s) (as approved by the COC). Further based on the expressions received the Resolution Professional verifies the credentials of all the participants and issues list of eligible Resolution Applicants. These Resolution Applicants (who have fulfilled all the parameters) can submit a Resolution Plan within the prescribed timeline (As per Form –G i.e. Invitation for Expression of Interest).
Resolution Plan – It is a document having the scheme/ plan of overall restructuring of the total debt of the Corporate Debtor. The Resolution Applicant(s) submit their Resolution Plan with the Resolution Professional. The Resolution Professional puts compliant Resolution Plans before COC for their consideration and voting. The COC put their votes on the Resolution Plan(s). Resolution Plan with maximum votes will be the winner and will be placed before Adjudicating Authority for its Final Approval.
Relinquishment of Security Interest – Upon initiation of Liquidation of Corporate Debtor, the secured creditors get an option to relinquish their security interest or they can realize the same on their own. By relinquishing the security interest, the assets become part of liquidation estate created by the liquidator and one treated by him for eventual distribution of value as per Section 53 of IBC (Waterfall).
Stakeholders Consultation Committee (SCC) – Erstwhile COC in CIRP, becomes the Stakeholders Consultation Committee. This committee advises the liquidator but the same is not binding on the liquidator. Liquidator acts differently has to record the reasons in writing.
Note – In liquidation there is no automatic appointment of Authorized Representative for class of creditors. The creditors with the support of liquidator can appoint an Authorized Representative.
Evaluation Matrix – A point score mechanism based on qualitative and quantitative parameters set out for evaluation of different Resolution Plans
Liquidation Estate – The liquidator has to take over all the assets of Corporate Debtor and create a Liquidation Estate to dispose of all assets of the Corporate debtor under Liquidation.
Interim Resolution Professionals (IRP) – Insolvency Professional appointed for first 30 days of resolution process of a Corporate Debtor. Insolvency Professional is appointed as IRP for a Corporate Debtor through the order of NCLT
Resolution Professionals (RP) – The COC may decide to continue with the same IRP as RP or can decide to appoint a new insolvency professional as RP to continue the resolution process of a Corporate Debtor. Only in case of a change of an IRP, the new Insolvency Professional would be appointed as RP through the order of NCLT
Liquidator – Insolvency Professional appointed to liquidate the assets and affairs of the Corporate Debtor appointed as Liquidator for the Corporate Debtor. Insolvency Professional is appointed as Liquidator for a Corporate Debtor through the order of NCLT
Authorized Representative - Authorized Representative (AR) would be appointed in case of class of Creditors. The Interim Resolution Professional while inviting claims through Public Announcement provide name of 3 Insolvency Professionals. Every class of creditor has to choose name of one of the AR among the 3 names provided in the Public Announcement. AR chosen by maximum number of creditors would be appointed as AR for that class of creditors.
Other than class of creditors any other COC member can also appoint an Insolvency Professional as their Authorized Representative.
The IBC law (along with various judgements on this issue) clarifies that claims which remain unclaimed or unpaid
Would stand extinguished as per Section 32A and decision of Supreme Court in Ghnsyamdas Mishra.
Section 238 (non obstante clause) read with Section 14 (Moratorium) of the Code provides that in case of any inconsistency among provisions of other law(s) and IBC, the provisions of IBC would prevail. The same is further supported by various judgements and court orders provided by various forums including the Supreme Court of India.
Approval of a resolution plan does not discharge a personal guarantor (of a corporate debtor) of his/her liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditor by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.
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