Module 2

Authorities Enforcement and Corporate Insolvency Resolution Process (CIRP)

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, by Operational Creditors under Section 9, and by the
Corporate Debtor under Section 10 respectively of the Insolvency and Bankruptcy
Code, 2016. The basic departure from the old law and new IBC is that any
company which has gone insolvent cannot merely start the Liquidation process at
primary stage till when it has gone through the process of CIRP, under the said
resolution process if it fails then only the company goes into liquidation.

On the admission of insolvency resolution application before National Company

Law Tribunal, it will make announcement to public for the submission of claims
by the creditors. Also, NCLT appoints the interim resolution professional and
declares Moratorium. Committee of Creditors takes decisions about the viability of
the company.

Part II of the IBC enshrines the insolvency resolution and liquidation for corporate
persons. Section 4 of IBC provides that Part II of the Code shall apply to matters
relating to the insolvency and liquidation of corporate debtors where the minimum
amount of the default is one lakh rupees. The proviso to section 4 empowers the
Central Government to specify, by notification, the minimum amount of default of
higher value but it shall not be more than one crore rupees.

Part II of the Insolvency and Bankruptcy Code, 2016 lays down the following two
independent stages:

(i) Corporate Insolvency Resolution Process [Sections 4 and 6 to 32] and

(ii) Liquidation [Sections 33 to 54 and Section 59]

Chapter II of Part II deals with CIRP while Chapter III together with Chapter V of
Part II governs the liquidation process for corporate persons.

The expression “corporate insolvency resolution process (CIRP)” is not defined in

the Insolvency and Bankruptcy Code, 2018. The Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016 defines the expression
“corporate insolvency resolution process”. According to Rule 3(b), “corporate
insolvency resolution process” means the insolvency resolution process for
corporate persons under Chapter II of Part II of the Code.

Section 6 of IBC provides that where any ‘corporate debtor’ commits a default, a
financial creditor, an operational creditor or the corporate debtor itself may initiate
corporate insolvency resolution process in respect of such corporate debtor in the
manner as provided under Chapter II of Part II of the Code.

According to section 5(8) of the Code, a “financial debt” means a debt along with
interest, if any, which is disbursed against the consideration for the time value of
money. According to section 5(8), a financial debt includes–

a) any amount raised by acceptance under any acceptance credit facility or its
dematerialized equivalent;
b) money borrowed against the payment of interest;
c) any amount raised under any other transaction, including any forward sale or
purchase agreement, having the commercial effect of a borrowing;
d) the amount of any liability in respect of any lease or hire purchase contract
which is deemed as a finance or capital lease under the Indian Accounting
Standards or such other accounting standards as may be prescribed;
e) any amount raised pursuant to any note purchase facility or the issue of
bonds, notes, debentures, loan stock or any similar instrument;
f) receivables sold or discounted other than any receivables sold on non-
recourse basis;
g) any counter-indemnity obligation in respect of a guarantee, indemnity, bond,
documentary letter of credit or any other instrument issued by a bank or
financial institution;
h) any derivative transaction entered into in connection with protection against
or benefit from fluctuation in any rate or price and for calculating the value
of any derivative transaction, only the market value of such transaction shall
be taken into account;
i) the amount of any liability in respect of any of the guarantee or indemnity
for any of the items referred to in sub-clause (a) to (h) of this clause.
The Insolvency and Bankruptcy Board of India (IBBI) falls under IBC 2016 and
regulates the profession as well processes related to insolvency and bankruptcy.
Section 196 of IBC 2016 explains about powers and functions of the board.
IBBI plays the role of governing body for all Insolvency Professional Agencies,
Insolvency Resolution Professional and Information Utilities. It enacts rules and
enforces them to resolve the corporate liquidation, corporate insolvency, individual
insolvency and bankruptcy as per IBC 2016. It helps and entrusted to implement
the provision of the IBC and acts to amend any law under it to suite the current
challenges. It also works towards resolving any insolvency for corporates,
partnership firms and individuals in a time bound or with punctuality in fashion to
maximize the value of insolvent entity and give back the due amount to the
creditors. It performs the tasks like registration of insolvency professional’s
agencies and certifies and monitors insolvency resolution professionals. IBBI also
charges fee and levy from professionals and agencies.

The Insolvency and Bankruptcy Board of India (IBBI) is constituted by ten-

member committee including one chairman, three members from Central
Government who cannot be below the rank of Joint Secretary or equivalent, One
member is nominated by Reserve Bank of India in the committee and rest five
members are nominated by Central Government of which at least three should
function as full time members.

Initiation of CIRP by Financial Creditor

Section 7 of IBC lays down the procedure for the initiation of the CIRP by a
financial creditor or two or more financial creditors jointly. It reads as follows;

1. A financial creditor either by itself or jointly with other financial creditors,

or any other person on behalf of the financial creditor, as may be notified by
the Central Government may file an application for initiating corporate
 insolvency resolution process against a corporate debtor before the
Adjudicating Authority when a default has occurred.
2. The financial creditor shall make an application under sub-section (1) in
such form and manner and accompanied with such fee as may be prescribed.
3. The financial creditor shall, along with the application furnish –
(a) record of the default recorded with the information utility or such other
record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim
resolution professional; and
(c) any other information as may be specified by the Board.
4. The Adjudicating Authority shall, within fourteen days of the receipt of the
application under sub-section (2), ascertain the existence of a default from
the records of an information utility or on the basis of other evidence
furnished by the financial creditor under sub-section (3).
5. Where the Adjudicating Authority is satisfied that –
(a) a default has occurred and the application under sub-section (2) is
complete, and there is no disciplinary proceedings pending against the
proposed resolution professional, it may, by order, admit such application;
(b) default has not occurred or the application under sub-section (2) is
incomplete or any disciplinary proceeding is pending against the proposed
resolution professional, it may, by order, reject such application:
6. The corporate insolvency resolution process shall commence from the date
of admission of the application under sub-section (5).
7. The Adjudicating Authority shall communicate –
(a) the order under clause (a) of sub-section (5) to the financial creditor and the
corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor, within
seven days of admission or rejection of such application, as the case may be”
Filing of application against a corporate debtor before the Adjudicating
Authority:

a. Furnishing of information by the financial creditor [Section 7(3)]

b. Time frame for ascertaining the existence of default [Section 7(4)].
c. Admission of application [Section 7(5)]
d. Rejection of application [Section 7(5)(b)]
e. Commencement of corporate insolvency resolution process
f. Communication of Order
g. Insolvency Resolution by Operational Creditor

 Demand notice or copy of invoice demanding payment of the debt

[Section 8(1)]
 Existence of dispute or payment of debt [Section 8(2)]

Initiation of CIRP by Operational Creditor

Section 9 of the Code reads as follows:

(1) After the expiry of the period of ten days from the date of delivery of the
notice or invoice demanding payment under sub-section (1) of section 8, if
the operational creditor does not receive payment from the corporate debtor
or notice of the dispute under subsection (2) of section 8, the operational
creditor may file an application before the Adjudicating Authority for
initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shall be filed in such form and manner
and accompanied with such fee as may be prescribed.
(3) The operational creditor shall, along with the application furnish –

a. a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;
b. an affidavit to the effect that there is no notice given by the corporate
debtor relating to a dispute of the unpaid operational debt;
c. a copy of the certificate from the financial institutions maintaining
accounts of the operational creditor confirming that there is no
payment of an unpaid operational debt by the corporate debtor, if
available;
d. a copy of any record with information utility confirming that there is
no payment of an unpaid operational debt by the corporate debtor, if
available; and
e. any other proof confirming that there is no payment of any unpaid
operational debt by the corporate debtor or such other information, as
may be prescribed.

(4) An operational creditor initiating a corporate insolvency resolution process

under this section, may propose a resolution professional to act as an interim
resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the
application under sub-section (2), by an order –

(i) admit the application and communicate such decision to the operational
creditor and the corporate debtor if, –
a. the application made under sub-section (2) is complete;
b. there is no payment of the unpaid operational debt;
c. the invoice or notice for payment to the corporate debtor has been
delivered by the operational creditor;
 d. no notice of dispute has been received by the operational creditor or
there is no record of dispute in the information utility; and
e. there is no disciplinary proceeding pending against any resolution
professional proposed under sub-section (4), if any.
(ii) reject the application and communicate such decision to the operational
creditor and the corporate debtor, if –
(a) the application made under sub-section (2) is incomplete;
(b) there has been payment of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for payment to the
corporate debtor;
(d) notice of dispute has been received by the operational creditor or
there is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending against any proposed
resolution professional:

Application by operational creditor before NCLT- IBC under Section 9(1)

provides that if the operational creditor doesn’t receive any of the payment of the
debt or a notice of existence of dispute in relation to the claimed debt from the
corporate debtor within a period of ten days from the date of receipt of the invoice
or demand notice under section 8, he can file an application with the NCLT for
initiating the insolvency resolution process in accordance with section 9 of IBC.

Further, Operational Creditor is supposed to comply for:

 Furnishing of information by operational creditor [Section 9(3)]

 Admission of application [Section 9(5)]
 Rejection of Application
  Commencement of corporate insolvency resolution process [Section 9(6)]

Initiation of CIRP by Corporate Applicant

Section 10 of the Insolvency and Bankruptcy Code, 2016 provides for the initiation
of corporate insolvency resolution process by the corporate debtor itself. Corporate
applicant is defined under Section 10(1) of the Code that means

(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorized to
make an application for the corporate insolvency resolution process
under the constitutional document of the corporate debtor; or
(c) an individual who is in charge of managing the operations and
resources of the corporate debtor; or
(d) a person who has the control, and supervision over the financial
affairs of the corporate debtor.

Admission or rejection of application- The National Company Law Tribunal

shall reject the application before 14 days, if any disciplinary proceeding is
pending against the proposed resolution professional or in case it is incomplete.
Prior notice to the applicant will be given to rectify the defects or errors in the
application within 7 days from the date of receipt of such notice from NCLT.
[Section 10(4)]

There are persons who has been excluded or are not eligible to make an application
has been given under Section 11 of the Code to initiate CIRP. Section 11 states
about the persons not entitled to make an application to initiate corporate
insolvency resolution process under Chapter II of Part II of the Insolvency and
Bankruptcy Code, 2016:
(a) a corporate debtor having completed corporate insolvency resolution process
twelve months preceding the date of making of the application; or
(b) a corporate debtor in respect of whom a liquidation order has been made; or
(c) a corporate debtor or a financial creditor who has violated any of the terms
of resolution plan which was approved twelve months before the date of
making of an application under this Chapter; or
(d) a corporate debtor undergoing a CIRP.

Similarly, a financial creditor or a corporate debtor who has not abided any of the
terms of the resolution plan that was approved twelve months before making an
application for initiating the process is also not entitled to make an application for
initiating the corporate insolvency resolution process. Finally, the insolvency
resolution process cannot be initiated again by a corporate debtor in respect of
which a liquidation order has been passed.

Time-limit for Completion of Insolvency Resolution Process

The Preamble of the Code states about IBC that it is “An Act to consolidate and
amend the laws relating to reorganization and insolvency resolution of corporate
persons, partnership firms and individuals in a time-bound manner…” To enable
this, detailed timelines have been prescribed under section 12 of the Code. It has
been asserted as following(s):
(1) The corporate insolvency resolution process shall be completed within a
period of 180 days from the date of admission of the application to initiate
such process.

(2) Before the Adjudicating Authority, the resolution professional shall file an
application to extend the time of CIRP beyond 180 days, if instructed to do
 so by a resolution passed at a meeting of the committee of creditors by a
vote of 2/3rd (66%) of the voting shares.

(3) If the Adjudicating Authority is satisfied on receipt of an application under

sub-section (2) that the subject matter of the case is such that CIRP cannot
be completed within 180 days, it may by order extend the duration of such
process beyond one hundred and eighty days by such further period as it
thinks fit, but not exceeding 90 days:

Further it has been provided that any extension of the period of CIRP under
section 12 shall not be granted more than once. Simply we can say that under
CIRP, the file will have to be closed within 270 days from the date of admission.

Recently, Section 12A was added by the Insolvency and Bankruptcy Code
(Second Amendment) Act, 2018 which provides that application admitted under
section 7 or section 9 or section 10, on an application made by the applicant with
the approval of ninety per cent voting share of the committee of creditors, the
Adjudicating Authority may allow the withdrawal of, in such manner as may be
specified thereto.

Declaration of Moratorium and Public Announcement

After admitting the application under section 7 or section 9 or section 10, the
National Company Law Tribunal shall, by an order as per section 13 of the Code
lists the actions that the National Company Law Tribunal shall take after an
application for initiating the corporate insolvency resolution process has been
admitted. It shall:

(a) Declare a moratorium for the purposes referred to in under section 14,
(b) Cause a public announcement of the initiation of corporate insolvency
resolution process and call for the submission of claims under section 15,
and

(c) Appoint an interim resolution professional in the manner as laid down in

section 16

Appointment, Tenure and Duties of Interim Resolution Professional

Section 16 provides for the appointment and term of the Interim Resolution
Professional by the adjudicating authority. Section 16(5) originally provided that
the term of the interim resolution professional shall not exceed thirty days from
date of his appointment but this sub-section was amended by the Insolvency and
Bankruptcy Code (Second Amendment) Act, 2018. Now the term of the interim
resolution professional continues till the date of appointment of the resolution
professional under section 22 of the Insolvency and Bankruptcy Code 2016.

Further, Insolvency and Bankruptcy Code 2016 and its amendment of 2018
provides for:

1. Appointment of Interim Resolution Professional – Section 22 of IBC

provides that at the first meeting of the committee of creditors (u/s 21) which
is held within seven days of its constitution, the committee of creditors by a
majority vote of minimum sixty-six percent (66%) of the voting share of the
financial creditors, may either resolve to appoint the interim resolution
professional as a resolution professional or to replace the interim resolution
professional by another resolution professional.
2. Communication of decision – According to section 22 (3) (a), where the
committee of creditors resolves to continue the interim resolution
professional as resolution professional, it shall communicate its decision to
 the interim resolution professional, the corporate debtor and the
Adjudicating Authority. The appointment of interim resolution professional
as resolution professional will be subject to a written consent from the
interim resolution professional in the specified form.

3. Replacement of Resolution Professional by Committee of Creditors-

Section 27 of IBC provides that a resolution professional may be replaced at
any time during the CIRP by the committee of creditors by minimum of a
66% percent majority of voting shares.

The committee of creditors reserves the right to replace such resolution

professional if they suspect collusion in between corporate debtor/management and
the resolution professional.

On the other hand, Fast Track CIRP has been given under section 55 to section 58
of the Insolvency and Bankruptcy Code, 2016. Section 56 provides for time period
for completion of fast track CIRP as 90 days and in case of extension, 45 extra
days but after the resolution being passed by the committee of creditors on
approval of adjudicating authorities with not less than 75% of voting shares.

Section 59 of the code deals with Voluntary Liquidation of Corporate Persons and
Section 60-67 deals with the Adjudicating Authority of Corporate Persons.

UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016;

1. Lawyer can issue Demand Notice on behalf of Operational Creditor

In the matter of Macquarie Bank Limited v. Shilpi Cable Technologies Ltd., the
Supreme Court settled the legal proposition under the Insolvency and Bankruptcy
Code, 2016 to hold that:
 (i) Section 9(3) (c) of the Code is directory and not mandatory in
nature.
(ii) Demand notice under the Code can be issued by the Lawyer on
behalf of the operational creditor.

2. Corporate Debtor cannot maintain appeal

In the case of Radius Infratel Pvt. Ltd. …Appellant v. Union Bank of India,
NCLAT has reiterated Supreme Court’s decision of the landmark judgement of the
case Innoventive Industries Ltd. v. ICICI Bank and Ors., whereby the Supreme
Court had held that directors who are no longer in management of the company,
once after an insolvency professional is appointed to manage the Company
obviously cannot maintain an appeal on behalf of the Company.

3. Time-limit for accepting or rejecting an petition under Code is directory or

mandatory

Hon’ble Apex Court in the matter of Surendra Trading Company v. Juggilal

Kamlapat Jute Mills Company Limited and Others held that the mandate of section
7 (5) or section 9 (5) or section 10 (4) is procedural in nature, a tool of aid in
expeditious dispensation of justice and is directory. It was further held by the court
that provision of removing the defects in an application within 07 days is directory
and not mandatory in nature.

4. Time-limit for completion of insolvency resolution process

Hon’ble Apex Court, in the case of Arcelormittal India Pvt. Ltd. v. Satish Kumar
Gupta & Ors when interpreting Section 12, held that the time limit for completion
of the insolvency resolution process as laid down under Section 12 of the Code is
mandatory and it cannot go be extended beyond 270 days (180 days + 70 days).