Step 1 – Application to the NCLT

A financial or operational creditor of a company, or the company itself, can

apply to the National Company Law Tribunal (“NCLT”) for an order to admit

that company (or “Corporate Debtor” as the IBC calls it) into the corporate

insolvency resolution process (“CIRP”). The creditor has to show that there

has been a default in the payment of its debt exceeding 1 lakh rupees. The

NCLT has to pass an order either admitting or denying the application within

14 days (although the National Company Law Appellate Tribunal (“NCLAT”)

in J.K. Jute Mills Co. v. M/s Surendra Trading Co. has now held that this

provision is merely directory).

Creditors have been divided into two distinct categories under the IB Code,

Financial Creditors and Operational Creditors. A financial creditor is defined

under Section 5(7) of the IBC to mean "a person to whom a financial debt is

owed and includes a person to whom such debt has been legally assigned or

transferred". Whereas an Operational Creditor is defined under Section 5(20)

of the IBC to mean "any person to whom an operational debt is owed and

includes any person to whom such debt has been legally assigned or

transferred"

Distinction between a financial creditor and operational creditor has been

drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final

report2. It states:

"Here, the Code differentiates between financial creditors and operational

creditors. Financial creditors are those whose relationship with the entity is a

pure financial contract, such as a loan or debt security. Operational creditors

are those whose liabilities from the entity comes from a transaction on

operations...The Code also provides for cases where a creditor has both a

solely financial transaction as well as an operational transaction with the

entity. In such a case, the creditor can be considered a financial creditor to

the extent of the financial debt and an operational creditor to the extent of

the operational debt." A financial creditor and an operational creditor need to

meet slightly different evidentiary thresholds when making their applications

before the NCLT. A financial creditor has to show the record of the default.

The IBC has created a new class of record keepers called “Information

Utilities” but since these have not yet been set up, the records maintained in

statements of accounts, bankers’ book certificates, and credit information

bureaus are currently being used.

In Innoventive Industries Limited v ICICI Bank Limited, one of the earliest

cases under the IBC, the NCLAT clarified that the scope of the NCLT’s

enquiry in such an application was limited to the question of whether or not

a default existed, and that it should not enquire further into the

circumstances of the default, or whether it was appropriate for the corporate

debtor to be admitted into CIRP. The Supreme Court recently endorsed this

position.

On the other hand, an operational creditor needs to first make a demand for

his unpaid debt and it is open to the corporate debtor to defend the claim on

the basis that there is an ongoing dispute.

Step 2 – CIRP starts; Interim Resolution Professional takes over;

moratorium sets in

Under Section 16(1) of The IBC, once a corporate debtor is admitted into the

CIRP (“Corporate Insolvency Resolution Process”), its board of directors

is suspended and its management is placed under an independent “interim

resolution professional”. From this point on and until the end of the CIRP,

the erstwhile management ceases to have any control over the affairs of the

company.

Simultaneously, under Section 14 of the IBC, a moratorium takes effect

which prohibits: (a) the continuation or initiation of any legal proceedings

against the corporate debtor, (b) the transfer of its assets, (c) the

enforcement of any security interest, (d) the recovery of any property from

it by an owner or lessor, and (e) the suspension or termination of the supply

of essential goods and services to it. The moratorium lasts till the corporate

debtor is in CIRP.

It is important to note here that the moratorium does not extend to key

business contracts entered into by the corporate debtor. Many contracts

stipulate insolvency, bankruptcy, and analogous proceedings as events that

trigger termination and the mere admission of the corporate debtor into

CIRP could give rise to the termination of its key business contracts.

Step 3 – Verification and classification of claims, appointment of the

Resolution Professional: Under Section 18(1)(b) of the IBC, the Interim

Resolution Professional will then invite and verify claims made by the

corporate debtor’s creditors, ccollate them,, under Section 21(1), form the

Committee of Creditors (“COC”), comprising all the financial creditors of the

corporate debtor. Each of the financial creditors have Voting Shares. As per

Section 5(28) of the IB Code, 2016, ‘Voting Share” means the share of the

voting rights of a single financial creditor in the COC which is based on the

proportion of financial debt owed to such financial creditor in relation to the

financial debt owed by the corporate debtor. All voting is carried out in

accordance with the voting shares of each financial debtor.

Step 4 – Appointment of the Resolution Professional

The COC then appoints an independent person to function as the “Resolution

Professional” under Section 22 for the remainder of the CIRP term. The

Resolution Professional may be the same person as the Interim Resolution

Professional, or someone else, depending on what the COC wants.

Insolvency Professionals are licensed professionals, who are registered with

the Insolvency and Bankruptcy Board of India ("Board") and are enrolled

with an insolvency professional agency. This professional is appointed as an

insolvency resolution professional to manage the resolution process and as a

liquidator to conduct liquidation of a corporate debtor. He or she is appointed

by the Adjudicating Authority and is given the power by the Adjudicating

Authority to effectively run and manage the entity as a going concern, and

assets of the entity at all times during the process of resolution.

Step 5 – Approval of the “resolution plan” or liquidation

As per Section 12(1) of The IB Code, a Resolution Plan for the revival of the

company needs to be approved by creditors holding 75% of the financial

debt within 180 days from the start of the CIRP. If the Resolution

Professional is instructed by resolution passed at a meeting of the COC by a

vote of 66%, he can file an application before the NCLT, which can extend

this by another 90 days.

Any person, including the erstwhile management, the creditors, or a third

party can propose such a plan. As it is the responsibility of the Resolution

Professional to verify that the plan meets the criteria set out in the IBC, it

would seem that the Resolution Professional cannot propose this plan,

although this is not expressly prohibited under the IBC.

If a plan is approved within this period and is sanctioned by the NCLT, it is

adopted and becomes binding on all “stakeholders” involved in the CIRP. The

term “stakeholders” has not been defined and while the IBC expressly
mentions that the resolution plan will bind the creditors, employees,

members, and guarantors, it is currently not clear what other stakeholders a

resolution plan can bind.

And if no resolution plan is approved in this period, the NCLT is required to

order the liquidation of the Corporate Debtor. If an order of liquidation is

passed, a liquidator will be appointed by the COC to sell the assets of the

corporate debtor and distribute the assets among the stakeholders. The

distribution will be made in accordance with a “priority waterfall” set out in

Section 53 of the IBC.

Time is of the essence, limited judicial role

The IBC, by providing for various time limits in the process, has introduced a

“time” element that was missing from previous legislations. Significantly,

liquidation has to be ordered compulsorily if a resolution is not worked out

within 180 days (or the extended 270 days). The expectation is that

stakeholders will be forced to work together in a constructive manner to

avoid liquidation.

Another significant deviation from the previous regime is that financial

creditors drive this process, not the courts. Ultimately, any resolution plan

has to be approved by the COC members holding 75% of the financial debt.

The NCLT needs to look only at some parameters set out in the IBC while

approving the resolution plan. This is quite a contrast to the earlier winding

up regime, where a court would determine whether a company should be

admitted into winding up or not.