Initiation of CIRP against liquidation of Companies

By Sushmita Dey-


Introduction -

A company comes into existence as a corporate body when it is registered and from that moment on it operates as a business enterprise. The workings of the company is regulated on the basis of the Companies Act, 2013 and it keeps on working until the day it has to wind up or liquidate itself. Liquidation or winding up of a company is the process through which the running life of a company comes to an end. The company ceases to exist after the process of liquidation. Liquidation occurs when a corporate body is unable to pay off the debt owed to the creditors of the business and have to sell their assets to compensate them.

Initially Section 270, 271 and 272 of the Companies Act, 2013 dealt with the winding up process. But introduction of the Insolvency and Bankruptcy Code, 2016 has made some amendments to these Sections of the Companies Act, 2013. They are –

1) Section 270 was substituted by the Code and now it only covers winding up by Tribunal.

2) Section 271 of the Act dealt with various situations under which a company could be wound up a Tribunal. However, now the Code deals with the situation of inability to pay off debts mentioned under the section.

3) Section 272 specified the persons who could file petition to the Tribunal, but the Code made some amendments to it and inserted a few grounds on the basis of which the persons can initiate winding up.

4) Voluntary winding up mentioned under Section 304 of the Companies Act, 2013 have been excluded.

The main purpose of the Insolvency and Bankruptcy Code, 2016 was to provide single law to manage the insolvency and bankruptcy issue in India. It basically fixes a time frame within which it aims to resolve the insolvency state of the company and pay off debts of the corporate body. And in case of no resolution, the company stands liquidated. The introduction of the Code took away the creditors power of initiating winding up in front of the NCLT under the Companies Act, 2013. However it provided a recovery mechanism referred to as Corporate Insolvency Resolution Process (CIRP) under the Code wherein, in case a corporate body becomes insolvent i.e. unable to pay off its debt then the creditors, both financial and operational, as well as the corporate debtor himself can initiate the process to find out whether the corporate body is capable of paying off the debt or not and in case, if it is not anymore capable to pay off debt then it is liquidated.

Who can initiate the Corporate Insolvency Resolution Process (CIRP) -

In case a corporate body defaults in making payment of their debts, there are namely three parties who can initiate the Corporate Insolvency Resolution Process (CIRP) –

1) Financial creditors - Financial creditors is defined under section 5(7) of the Insolvency and Bankruptcy Code, 2016, as a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. In simple terms, a person who has lend money to the corporate entity as credit or loan, on which interest has to be paid is a financial creditor. They have contractual relationship with the company and are given preference at the time of payment of debts.

2) Operational creditors - Operational creditors is defined under section 5(20) of the Insolvency and Bankruptcy Code, 2016, any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. In other words, a person who has provided the company with goods or services and who has to be paid for the same is a operational creditor. Their relationship with the company is formed on the happening of a transaction or operation as the name suggests and they come next in line to the financial creditors at the time of payment of debts.

3) Corporate debtors - Corporate debtors is defined under section 3(8) of the Insolvency and Bankruptcy Code, 2016, as person who owes a debt to any person. In other words, he is the corporate entity itself. In case the corporate debtors figures out that it isn’t capable of paying off its debt and is on the verge of insolvency it can initiate CIRP before the Adjudicating Authority.

Process of initiating the Corporate Insolvency Resolution Process (CIRP) –

As mentioned above the process of CIRP can be initiated by financial creditors, operational creditors and corporate debtors. CIRP can be initiated if the minimum defaulted amount is 1 lakh or more until recently, which the government has now increased to 1 crore.

CIRP initiated by Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016

In case of a default the financial creditor can file an application to initiate CIRP in front of the Adjudicating Authority either by itself or jointly with other financial creditors against the Corporate debtor under Section 7 of the Code. The application fee needed is Rs. 25,000. The creditor will have to include the documents that will act as proof that the default has been made. He will also have to mention the name of the person who is to act as the interim resolution professional.

After the application is filed, the Adjudicating Authority has 14 days to ascertain whether a default has actually been made or not. He might refer to the documents submitted by the financial creditor. The Adjudicating Authority must be sure about the authenticity, completeness of the application and also ascertain the fact that there isn’t any disciplinary proceeding against the supposed resolution professional. If the Adjudicating Authority isn’t satisfied with the application, then it can very well reject it, however not before granting a grace period of 7 days to make amendments in case of an incomplete application.

The decision of the Adjudicating Authority, whether accepted or rejected, needs to be communicated to both the financial creditor as well as corporate debtor within 7 days. If the application is admitted, the resolution process will start from the date of admission of such application.

The case of Innoventive Industries Limited V. ICICI Bank can be referred to understand how the process of CIRP initiated by financial creditor works. The appeal of the Innoventive Industries Limited in this case was rejected by the Supreme Court, and the decision of the National Company Law Tribunal of admitting the insolvency petition filed against Innoventive Industries Limited by ICICI Bank was supported.

CIRP initiated by Operational Creditors under Section 9 of the Insolvency and Bankruptcy Code, 2016

Before initiating the process of CIRP, under Section 9 of the Code, it is essential that the operational creditor issues a notice to the corporate debtor about the default made under Section 8 of the Code and demands the payment of the same amount. Within 10 days of receiving such notice, the corporate debtor has to make a reply to the operational creditor stating the reason why the default was made. He has to make the operational creditor aware of any ongoing suit in any court of law or tribunal before the notice of the default was served. And in case the amount which is claimed as unpaid was cleared or the operational creditor has already encashed the cheque which was given against the amount due, then the corporate debtor must attach documents which will be evidence to the fact that the amount was paid.

The importance of demand notice can be understood by studying the case of Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd. Here Kirusa Software, the operational creditor filed an application initiating CIRP before the NCLT, which was rejected on the basis that reply to the notice was made. However, the NCLAT on the other hand admitted the application stating that the reply to notice cannot be accepted on the ground that the dispute which the respondent has mentioned does not fall within the bounds of the disputes acceptable. When Mobilox Innovations made an appeal to the Supreme Court against the decision of the NCLAT, the apex court supported the appeal made saying that dispute mentioned was sufficient to not go ahead with CIRP.

After the period of 10 days is over and the corporate debtor has not made the payment of the amount due or provided any reason as to why the default has been made, the operational creditor has the right to initiate CIRP under Section 9 of the Code before the Adjudicating Authority by filing an application. The application to be paid by the operational creditor is Rs. 2000. The application will be accompanied by the notice served, invoice demanding payment. It must also include an affidavit proving the fact that the corporate debtor has given no notice about any ongoing dispute and a certificate from the financial institution as a proof that no payment has been made by the corporate debtor. The operational creditor has the option to choose a resolution professional who would act as the interim resolution professional.

The Adjudicating Authority within 14 days of filing of the application has to accept or reject the application as the case maybe, after analyzing various factors –

a) Whether the application is complete or not.

b) Whether payment of the debt claimed due is made or not.

c) The notice for payment to the corporate debtor has been served by the operational creditor or not.

d) The notice of any dispute has been received by the operational creditor or not.

e) Whether there is any disciplinary proceeding pending against the proposed interim resolution professional or not.

The decision of the Adjudicating Authority has to be communicated to both the operational creditor as well as the corporate debtor. However, before rejecting the application a period of 7 days must be granted to the operational creditor to rectify any mistake in the application. If the application is admitted, the resolution process will start from the date of admission of such application.

CIRP initiated by Corporate Debtors under Section 10 of the Insolvency and Bankruptcy Code, 2016

The corporate debtor under Section 10 of the Code may initiate CIRP itself after a default in payment is made by it. The application has to be filed before the Adjudicating Authority, with a fee of Rs. 20,000. The application must also include information such as the book of accounts of the company and the name of the resolution professional who is supposed to act as the interim resolution professional.

Within 14 days of the application, the Adjudicating Authority has to decide whether to accept or reject the application depending on the fact that the application is complete or incomplete. In case of incomplete application, 7 days will be granted to the corporate debtor to remedy any defects made in the application. The CIRP will be initiated from the date on which the application is accepted.

The process of CIRP in each case has to be completed within one hundred and eighty days. However, an application can be filed by the interim resolution professional before the Adjudicating Authority to increase the time limit. If Adjudicating Authority is satisfied that the process cannot be completed within the given time frame the the time limit is increase, but it cannot be increased beyond 90 days. If the interim resolution professional fails to find a resolution, then the company will be liquidated.

Conclusion

The main purpose of establishing the Insolvency and Bankruptcy Code, 2016 was to make a united rule to regulate the insolvency and bankruptcy problem of the company. So far, it has succeeded to provide easy solution for the same. The process of CIRP is a detailed one and hence, all rules pertaining to it must be followed to get the desired result.

References

1) Shreya Choudhary, The Bankruptcy Code & Sections 270-272 of the Companies Act, 2013- An Analysis, the CBCL Blog, 29th June, 2017, https://cbcl.nliu.ac.in/company-law/the-bankruptcy-code-sections-270-272-of-the-companies-act-2013-an-analysis/

2) Pranav Somani, Procedure to Initiate CIRP under IBC, 2016, Legal Service India E-Journal, http://www.legalserviceindia.com/legal/article-2581-procedure-to-initiate-cirp-under-ibc-2016.html#:~:text=The%20Financial%20Creditor%20or%20Operational,interest%20on%20the%20principal%20amount.&text=The%20basic%20purpose%20to%20initiate%20CIRP%20is%20to%20claim%20the%20debt.

3) Khurana and Khurana, Winding Up/ Liquidation Process Under The Companies Act, 2013 Vis-à-Vis Insolvency And Bankruptcy Code, 2016, Mondaq connecting knowledge and people, 15th May 2020, https://www.mondaq.com/india/corporate-and-company-law/934250/winding-up-liquidation-process-under-the-companies-act-2013-vis-vis-insolvency-and-bankruptcy-code-2016

4) http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3VK3z+UyKqKkqs0scgN2B3wlimu6isnJvRuJb5BeVawFmJaX43ZqNlTwLPeNhsgdG

5) Shivangi Singh, Innoventive Industries Limited V. ICICI Bank Ltd, The Company Ninja, 28th February, 2021, https://thecompany.ninja/innoventive-industries-ltd-vs-icici-bank-ltd/#:~:text=The%20Supreme%20Court%20dismissed%20the,petition%20filed%20by%20ICICI%20Bank

6) Tarun Gaur, Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, Mondaq, 5th January,2018, https://www.mondaq.com/india/insolvencybankruptcy/661280/mobilox-innovations-private-limited-vs-kirusa-software-private-limited



Author- Sushmita Dey

LL.B, Semester V

J.B. Law College








10 views0 comments