Procedural aspects of Corporate Insolvency Resolution Process | CIRP

The Corporate Insolvency Resolution Process | CIRP

  • The ball starts rolling with the Adjudicating Authority, after admitting an application under either Sections 7(by financial creditor), 9(by operational creditor) or 10(by corporate applicant), ordering that a public announcement of the initiation of the CIRP together with calling for the submission of claims under Section 15 shall be made. (Section 13(1)(b) of IBC, 2016) Moratorium is also announced and no suit against the debtor can be filed until the process is completed.
  • For this purpose, the Adjudicating Authority appoints an interim resolution professional in the manner laid down in Section 16 (Section 13(1)(c) of IBC, 2016)
  • In the public announcement of the CIRP, under Section 15(1), information as to the last date for submission of claims, as may be specified, is to be given; details of the interim resolution professional, who shall be vested with the management of the corporate debtor and be responsible for receiving claims, shall also be given, and the date on which the CIRP shall close is also to be given. (Section 15(1)(c), (d) and (f) of IBC, 2016)
  • Under Section 17 of the Code, the management of the affairs of the corporate debtor shall vest in the interim resolution professional, the Board of Directors of the corporate debtor standing suspended by law.
  • Among the important duties of the interim resolution professional is the receiving and collating of all claims submitted by creditors and the constitution of a Committee of Creditors. (Section 15(1)(b) and (c) IBC, 2016)
  • Section 21(2) of the Code mandates that the Committee of Creditors shall comprise all financial creditors of the corporate debtor. Section 24 of the IBC deals with the meetings of the Committee of Creditors. Though voting on the approval of a resolution plan is only with the financial creditors who form the Committee of Creditors, yet the resolution professional is to conduct the aforesaid meeting at which members of the suspended board of directors may be present, together with one representative of operational creditors, provided that the aggregate dues owed to all operational creditors is not less than 10% of the entire debt owed. (Section 24(2)(3) and (4) of IBC, 2016) Voting shall be in accordance with the voting share assigned to each financial creditor, which is based on the financial debts owed to such creditors. (Section 24(6) of IBC, 2016)
  • Under Section 20 of the Code, the interim resolution professional is to 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.
  • At the first meeting of the Committee of Creditors, which shall be held within 7 days of its constitution, the Committee, by majority vote of not less than 66% of the voting share of financial creditors,  must immediately resolve to appoint the interim resolution professional as a resolution professional, or to replace the interim resolution professional by another resolution professional. (Section 22(1) and (2) IBC, 2016)
  • Under Section 23(1), the resolution professional shall conduct the entire CIRP and manage the operations of the corporate debtor during the same. However, resolution professional cannot take certain decisions relating to management of the corporate debtor without the prior approval of at least 66% of the votes of the Committee of Creditors. (Section 28 of IBC, 2016) nothing can be done qua the management of the corporate debtor by the resolution professional which impacts major decisions to be made in the interregnum between the taking over of management of the corporate debtor and corporate resolution by the acceptance of a resolution plan by the requisite majority of the Committee of Creditors.
  • Importantly, all meetings of the Committee of Creditors are to be conducted by the resolution professional, who shall give notice of such meetings to the members of the Committee of Creditors, the members of the suspended board of directors, and operational creditors, provided the amount of their aggregate dues is not less than 10% of the entire debt owed.
  • Like the duties of the interim resolution professional under Section 18 of the Code, it shall be the duty of the resolution professional to preserve and protect assets of the corporate debtor including the continued business operations of the corporate debtor. (Section 25(1) of IBC, 2016) For this purpose, he is to maintain an updated list of claims; convene and attend all meetings of the Committee of Creditors; prepare the information memorandum in accordance with Section 29 of the Code; invite prospective resolution applicants; and present all resolution plans at the meetings of the Committee of Creditors. (Section 25(2)(e) to (i) of IBC, 2016)
  • Under Section 29(1) of the Code, the resolution professional shall prepare an information memorandum containing all relevant information, as may be specified, so that a resolution plan may then be formulated by a prospective resolution applicant.
  • Under Section 30 of the Code, the resolution applicant must then submit a resolution plan to the resolution professional, prepared on the basis of the information memorandum.
  • After this, the resolution professional must present to the Committee of Creditors, for its approval, such resolution plans which conform to the conditions referred to in Section 30(2) of the Code. (Section 30 (3) of IBC, 2016)
  • Under Section 30(4), the Committee of Creditors may approve a resolution plan by a vote of not less than 66% of the voting share of the financial creditors, after considering its feasibility and viability, and various other requirements as may be prescribed by the Regulations.
  • If the resolution plan is approved by the requisite majority of the Committee of Creditors, it is then the duty of the resolution professional to submit the resolution plan as approved by the Committee of Creditors to the Adjudicating Authority. (Section 30 (6) of IBC, 2016)
  • Under Chapter IV of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, claims by operational creditors, financial creditors, other creditors, workmen and employees are to be submitted to the resolution professional along with proofs thereof. (Regulations 7 to 12 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016)
  • Thereafter, under Regulation 13, the resolution professional shall verify each claim as on the insolvency commencement date, and thereupon maintain a list of creditors containing the names of creditors along with the amounts claimed by them, the amounts admitted by him, and the security interest, if any, in respect of such claims, and constantly update the aforesaid list. (Regulations 13(1) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016)
  • Chapter X of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 then deals with resolution plans that are submitted.
  • Under Regulation 35, “fair value” as defined by Regulation 2(hb) i.e. “the estimated realizable value of the assets of the corporate debtor, if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion” and “liquidation value” as defined by Regulation 2(k) e. “the estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date” shall be determined by two registered valuers appointed under Regulation 27, which shall be handed over the resolution professional.
  • After receipt of the resolution plans in accordance with the Code and the Regulations, the resolution professional shall then provide the fair value and liquidation value to every member of the Committee of Creditors.(Regulations 35(2) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016)
  • Regulation 36 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 is important as it forms the basis for the submission of a resolution plan. The information memorandum, spoken of by this regulation, must contain the following:
    • assets and liabilities with such description, as on the insolvency commencement date, as are generally necessary for ascertaining their values. “Description” includes the details such as date of acquisition, cost of acquisition, remaining useful life, identification number, depreciation charged, book value, and any other relevant details.
    • the latest annual financial statements;
    • audited financial statements of the corporate debtor for the last two financial years and provisional financial statements for the current financial year made up to a date not earlier than fourteen days from the date of the application;
    • a list of creditors containing the names of creditors, the amounts claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims;
    • particulars of a debt due from or to the corporate debtor with respect to related parties;
    • details of guarantees that have been given in relation to the debts of the corporate debtor by other persons, specifying which of the guarantors is a related party;
    • the names and addresses of the members or partners holding at least one per cent stake in the corporate debtor along with the size of stake;
    • details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities;
    • the number of workers and employees and liabilities of the corporate debtor towards them;
    • other information, which the resolution professional deems relevant to the committee.
  • Under Regulation 36-A, the resolution professional shall then publish brief particulars of the invitation for expression of interest in Form G of the Schedule. This document must also, inter alia, provide for such basic information about the corporate debtor as may be required by a prospective resolution applicant for its expression of interest, (Regulation 36-A (4)(c) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016)
  • The prospective resolution applicant has a right to receive complete information as to the corporate debtor, debts owed by it, and its activities as a going concern, prior to the admission of an application under section 7, 9 or 10 of the Code. For this purpose, it has a right to receive information contained in the information memorandum as well as the evaluation matrix mentioned in Regulation 36-B.
  • The resolution plan submitted by the prospective resolution applicant must provide for measures as may be necessary for the insolvency resolution of the corporate debtor for maximisation of the value of its assets, which may include transfer or sale of assets or part thereof, whether subject to security interests or not. The plan may provide for either satisfaction or modification of any security interest of a secured creditor and may also provide for reduction in the amount payable to different classes of creditors (Regulation 37 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016) Regulation 38 then deals with the mandatory contents of a resolution plan, making it clear that such plan must contain a provision that the amount due to operational creditors shall be given priority in payment over financial creditors (Regulation 38(1) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016) Such plan must also include provisions as to how to deal with the interests of all stakeholders including financial creditors and operational creditors of the corporate debtorRegulation 38(1A) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016) It must then provide for the term of the plan, management and control of the business of the corporate debtor during such term, and its implementation. It must also demonstrate that it is feasible and viable, and that the resolution applicant has the capability to implement the said plan.
  • The resolution professional, once he receives a proposed resolution plan, must then conduct due diligence based on the material on record, in order that the prospective resolution applicant complies with Section 25(2)(h) of the Code (which, inter alia, requires prospective resolution applicants to fulfil such criteria as may be laid down, having regard to the complexity and scale of operations of the business of the corporate debtor); the provisions of Section 29-A; and other requirements as may be specified in the invitation for expression of interest. (Regulation 36-A(8) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016)
  • However, it must not be forgotten that a Resolution Professional is only to “examine” and “confirm” that each resolution plan conforms to what is provided by Section 30(2). the Resolution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects, before submitting it to the Committee of Creditors. The Resolution Professional is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the Committee of Creditors, who may or may not approve it. The fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time being in force, including Section 29-A of the Code, only means that his prima facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to “decide” whether the resolution plan does or does not contravene the provisions of law.
  • Once this is done, the resolution professional shall issue a provisional list of eligible prospective resolution applicants to the Committee of Creditors, and after considering any objection to their inclusion or exclusion, shall then issue the final list of prospective resolution applicants to the Committee of Creditors (Regulation 36-A(10) to (12) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016)
  • Under Regulation 36-B, the resolution professional shall issue the information memorandum, evaluation matrix, as defined by Regulation 2(h)(a) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 i.e. “such parameters to be applied and the manner of applying such parameters, as approved by the committee, for consideration of resolution plans for its approval”, and a request for resolution plan within the time stated. Importantly, the resolution professional shall endeavour to submit the resolution plan approved by the Committee of Creditors to the Adjudicating Authority, at least 15 days before the maximum period for completion of CIRP, along with a compliance certificate in Form H of the Schedule.
  • Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. However, after a resolution plan is approved by the requisite majority of the Committee of Creditors, the aforesaid plan must then pass muster of the Adjudicating Authority under Section 31(1) of the Code.
  • The limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned.
  • While the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal. There is no residual jurisdiction with the adjudicating authority not to approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been looked into and taken care of.
  • While leaving the provision otherwise intact, the word “mandatorily” used in 2ndproviso of Section 12(3) of IBC, 2016 is struck down as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution. The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days. Even under the newly added proviso to Section 12, if by reason of all the aforesaid factors the grace period of 90 days from the date of commencement of the Amending Act of 2019 is exceeded, there again a discretion can be exercised by the Adjudicating Authority and/or Appellate Tribunal to further extend time keeping the aforesaid parameters in mind. It is only in such exceptional cases that time can be extended, the general rule being that 330 days is the outer limit within which resolution of the stressed assets of the corporate debtor must take place beyond which the corporate debtor is to be driven into liquidation.
  • There is no residual equity jurisdiction in the Adjudicating Authority or the Appellate Tribunal to interfere in the merits of a business decision taken by the requisite majority of the Committee of Creditors, provided that it is otherwise in conformity with the provisions of the Code and the Regulations
  • The Committee of Creditors does not act in any fiduciary capacity to any group of creditors. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors.

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