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Bankruptcy Law - An Opportunity to Revive Debt-Ridden Business

by Jenni Gay (2020-02-18)


Business failure is an integral part of any economy. If the failure is a result of a wrong business model or fraud, then a quick liquidation may be the most viable outcome. Here's more information on LAW SERVICES Helping individuals and families regain control [https://www.tuugo.us/Companies/the-jones-law-firm-llc/0310006565783] stop by our page. However, there may be situations such as while the business is generating revenue, the company is still failing to pay debt. This may due to a wrong financial model resulting into a mismatch between receivable and payable of the entity. A debt restructuring may be an effective resolution under such situation rather than liquidation.

Instead of extending support to a genuine entrepreneur who is on a financial stress, the lenders and other creditors attacked such businessman with multiple legal actions such as proceedings under SARFAESI Act for taking possession of secured properties; filing cases before debt recovery tribunals and civil courts; filing criminal cases under Negotiable Instruments Act for dishonouring of cheque, etc. The debtor and their guarantors end up in spending most of their time for fighting the cases in several courts instead of concentrating on business and its revival. The same system also miserably failed to take any effective action against errant promoters who used their business to defraud financial institutions, thereby reducing the country one of the lowest in the world in terms of recovery.

The enactment of Insolvency and Bankruptcy Code 2016 (IBC) led to a paradigm shift in the bankruptcy regime in India. For the first time, we have a law, which aims to bring about this balance in a time bound manner. The Code deals with insolvency resolution of corporates as well as individuals and partnerships. However, only the process for corporate insolvency resolution has so far been notified.

IBC prescribes a minimum threshold to commence corporate insolvency resolution. The process can be initiated against a company upon the occurrence of a default in payment of any debt, provided the minimum amount of default is Rupees one lakh. The process can be commenced even if the default is only in respect of a part of the debt or an instalment so long as it satisfies the minimum threshold.

Both creditors and debtor can trigger corporate insolvency process. IBC differentiates the creditors as financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract such as loan or debt. Operational creditors are those, whose liability from the entity comes from a transaction on operation such as supply of goods, services etc. Claims of employees or Government are also included in the definition of operational credit. If a creditor has both financial and operational transaction with the entity, the creditor can be considered as financial creditor to the extent of the financial debt and as an operational creditor to the extent of operational debt.

A financial creditor can trigger the corporate insolvency process upon the occurrence of an event of default in any financial debt owed to any financial creditor by the corporate debtor. It is not necessary that the debt should be owed to the applicant financial creditor; it can be triggered in case of cross default also. The financial creditor can initiate the proceeding by filing an application along with required documents to the adjudicating authority under the IBC, which is the National Company Law Tribunal (NCLT) under whose jurisdiction the debtor has been incorporated.

In case of operational creditor, prior to the initiation of the process, he has to first serve a demand notice of unpaid debt to the corporate debtor. Within 10 days from the receipt of demand notice, the debtor shall either repay the amount or provide a notice of dispute in respect of the demand. The dispute shall be an existing dispute as on the date of the demand notice. No insolvency process can be initiated against the debtor, if there is a pre-existing dispute in respect of the demand. Operational creditor can initiate insolvency resolution process, if he didn't receive any payment or notice of dispute from the debtor against the demand notice with in the specified time. The proceeding can be initiated by filing an application before the NCLT along with a copy of demand notice.

The corporate debtor itself can commence insolvency proceeding by filing an application before NCLT along with necessary documents, if it defaulted any debt. NCLT will merely look in to the record to see that default has occurred. It doesn't matter that there is any dispute in respect of the debt.

Once the application has been filed, NCLT shall either accept or reject the same within fourteen days of the receipt of application. The corporate insolvency resolution process will start from the date of admission of application by NCLT. IBC defines a default maximum period of 180 days from the date of admission to complete the resolution process. NCLT can extend this period for another 90 days in complex cases upon request by the committee of creditors. The period cannot be extended further. IBC also provides for a fast track resolution process for certain less complex matters, where resolution process has to be completed within 90 days of the application.

After the admission of the application, NCLT by an order declare a moratorium during which no legal proceeding can be filed against the debtor. All existing proceeding against the debtor will also be suspended during this period. The moratorium will be active till the time of the completion of resolution process. The purpose of moratorium period is to provide a 'calm period' for the creditors and the debtor to negotiate viability of the entity.

Simultaneously, NCLT will also cause a public announcement to be announced in the website of Insolvency and Bankruptcy Board of India (IBBI), which is the regulator constituted under IBC. The public announcement will state inter alia the last date of submission of claims and details of the interim resolution professional, who shall be vested with the management of the corporate debtor and be responsible for receiving claims.

The interim resolution professional is a professional registered and regulated by IBBI, who is responsible for the management of the debtor during the resolution process. While the Code mandates the financial creditor or the debtor to nominate the interim resolution professional while filing the application, it is only optional for operational creditor. If the operational creditor didn't propose the interim insolvency professional, then NCLT will request IBBI to nominate the same. Up on his appointment, the power of the board of director of the debtor will stand suspended and vested with the interim resolution professional. The interim resolution professional will collect all information regarding asset, operation and liability of the debtor and collate all claims submitted by creditors. Thereafter, the interim resolution professional shall constitute a committee of creditors, consisting of financial creditors. The committee of creditor will either confirm the appointment of interim resolution professional or appoint a new resolution professional.

Any person who wants to revive the company can submit a resolution plan to the resolution professional. The plan must provide for payment of insolvency resolution process costs; management of the affairs of the corporate debtor after approval of the plan; and implementation and supervision of the plan. Any resolution plan, in order to be effective, requires the approval of 75% of the committee of creditors by weight of the total financial liabilities. The decision of the committee will be binding on all creditors. Once the committee clears the resolution plan, the role of the NCLT is limited to approve the plan if it adheres to the guidelines prescribed in the Code. The resolution plan as approved by the NCLT will be binding on the corporate debtor, employees, members, creditors, guarantors and all other stakeholders. All these need to be achieved with in the prescribed time limit of 180 days, which may be extended for a further period 90 days up on approval of committee of creditors. In the absence of any approved resolution plan within the prescribed time line, the debtor goes into liquidation.

A bankruptcy law shall give an opportunity to genuine entrepreneur, who is undergoing financial stress while penalising intentional defaulters. When a company defaults, the best out come will be restructuring of the liability so that the company can continue as a going concern or replacement of the management of the company or both. Liquidation shall be the last resort as it results into destruction of the entity. The challenge of a bankruptcy law is to provide for the exploration of various possibilities while ensuring not much time is lost during the process, as delay will result in erosion of value. IBC creates an efficient institutional framework and a conducive environment for exploration and evaluation of various possibilities available to the entity in a time bound manner.

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