Role of Adjudicating Authority in CIRP & Liquidation under Insolvency

and Bankruptcy Law

Submitted To: Amit Pratap Singh Submitted By: Shachi Singh

Assistant Professor Roll no.: 2014BALLB92
 Abstract

Insolvency and Bankruptcy Code, 2016 was notified by the Government of India on 28th
May 2016. The Act consolidates and amends the laws relating to reorganization and
insolvency resolution of corporate persons, partnership firms and individuals in a time
bound manner for maximization of value of assets of these persons, to promote
entrepreneurship, availability of credit and balance the interests of all the stakeholders.
IBC, 2016 also altered the order of priority various payment dues; and put the payments
of workmen’s dues in foremost priority over Government dues. The payments of
Government dues are kept after payment of financial debts owed to unsecured creditors.
IBC, 2016 provides the complementary ecosystem for the insolvency law, and aims to
ensure smoother settlement of insolvency cases, enable faster turnaround of businesses
and provide for creating a database of creditors.

The Corporate Insolvency Resolution Process can be initiated by making an application

to the National Company Law Tribunal (NCLT) by the Financial Creditors under Section
7 of IBC, 2016 by Operational Creditors under Section 9 of the IBC, 2016 and by the
Corporate Debtor himself under Section 10 of the IBC, 2016. The basic departure from
the old law and fundamental rule under this new codified law is that a company which has
gone insolvent cannot start the Liquidation process at the primary stage until and unless it
has gone through the process of Corporate Insolvency Resolution Process (CIRP), under
the said resolution process options for revival of the company is looked into and if the said
resolution process fails then only the company goes into liquidation.
 Role of Adjudicating Authority

In case a corporate debtor makes a default in repayment of dues of the creditors, the financial
creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any
authorized member, a person who has the controlling capacity over the financial affairs of the
corporate debtor has the power to start the insolvency resolution process. In order to initiate the
resolution process, an application has to be made to National Company Law Tribunal (NCLT)
under (Section 10, IBC, 2016 in case of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case
of Financial Creditors and Operational Creditors).

A ten days demand notice under (Section 8(2) of IBC, 2016 in case of Operational Creditors) has
to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT
under Section 9 of IBC, 2016). However, an operational creditor can directly approach the
NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing
difference.

The new code states that the insolvency process of a Corporate Debtor must be concluded within
180 days from the date of initiation in the NCLT (Section 12, IBC of 2016). The claims of the
Creditors shall be frozen for a period of six months on admission of application by NCLT.
During this time, the NCLT shall listen to the options to revive and decide the future course of
action. It is further clarified that unless a resolution plan is made or liquidation process is
initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court
(Section 14 of IBC, 2016).

When the application for insolvency is accepted under Section 7/9/10 of IBC, 2016 the NCLT
within fourteen days appoints an Insolvency Resolution Professional (IRP) on receiving a
confirmation from Board of Insolvency and Bankruptcy. The appointed IP then takes up the
responsibility of the debtor’s properties and functioning. He also collects all the information that
is relevant with regard to the financial condition of the debtor from information utilities. IP is
appointed for a term of thirty days only within which he does all the necessary scrutinization
(Section 18, IBC, 2016).
The next step is to make a public announcement about the commencement of corporate
insolvency process so that claims from any other creditors can also come forward, if any. A
creditor’s committee is constituted by the IRP post receiving any claims by public announcement
(Section 13 of IBC, 2016). In the event any financial creditor is a related party of the defaulting
debtor, such a creditor will not have the right to represent, participate or vote in the committee of
creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average
dues of the operational creditors must be at least ten percent of the debt. The Committee of
Creditors shall first seven days of its incorporation decide through seventy five percent votes
whether the interim IRP should be used as a Resolution Professional or should be replaced with
someone else.

After the Committee finalizes the Resolution Professional he is appointed by the NCLT (Section
16 of IBC, 2016). The Resolution Professional so appointed can be replaced anytime by the
Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the
appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with
regard to insolvency resolution by seventy five percent majority voting.

In the event majority (75%) of the financial creditors are of the view that the case is very
complex and more time extension is required, the NCLT may grant a one-time extension of up to
a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole
responsibility of the Resolution Professional to manage and conduct the corporate insolvency
resolution procedure during such a term (Section 18 of IBC, 2016).

To enable the resolution applicant for preparing a resolution plan, the Resolution Professional
shall compile a statistics note. A resolution applicant can be defined as an individual who has the
duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s
Committee further receives the plan from the Resolution Professional for its approval.

On the resolution being approved, the next step by the Creditor’s Committee is to come up with
options on restructuring which can be either coming up with a modified repayment plan or to
simply liquidate the properties of the company in order to recover dues. If the Creditor’s
Committee fails to take any binding decision with regard to the repayment by the debtor, the
debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for
resolution, the same shall be sent to NCLT for approval and implementation.
 Liquidation

The liquidation process commences only if:

 The Creditors Committee fails to submit the resolution plan with the provided time frame
to the NCLT.

 The Resolution Plan is rejected because of non-adherence to the Code.

 The Creditor’s Committee takes a decision for liquidating the assets by a majority vote.

 The resolution plan is flouted by the debtor.

As mentioned above, no suit can be instituted by or against the corporate debtor during
liquidation process (Section 14 of IBC, 2016). The only exception, in this case, can be through
the liquidator representing the corporate debtor based on the permission of the NCLT. The
liquidator shall be the same person as the Resolution Professional lest replaced. The liquidator so
appointed shall constitute the liquidation estate which shall comprise of all the properties,
whether financial or immovable, of the corporate debtor. The claims of the creditors may be
received, verified, admitted or rejected based on the final decision of the liquidator within a
prearranged time. In order to appeal to the adjudicator, the creditor gets a total of fourteen days.

Based on the priority, a security creditor may receive the proceeds from sale of assets or realize
the security interest by enforcing or dealing with the secured asset as per the applicable laws
related to him. He may either relinquish his security interest or realize it based on his intent. Any
supplementary sum so realized shall be submitted to the liquidator. Although the security
creditors will be paid by the liquidator on priority basis out of the corporate debtor’s assets, his
claim shall be considered subordinate to the unsecured creditors to the extent of deficit. The
distribution shall be in manner laid down in the Code. All those persons who have any sort of
individual rights over the assets of the debtor shall also form a part of the liquidation procedure.
There are certain funds which cannot be attached to the estate of the debtor for recovery of debts.
Such funds are provident fund, gratuity fund and the pension fund because this amount belongs
to the employees and workmen and hence they are given the priority with regard to these funds.
Once all the assets of the corporate debtor are liquidated, the NCLT passes an order to finally
liquefy the corporate debtor.