Insolvency Resolution And Liquidation for Corporate Persons

Introduction

The Insolvency and Bankruptcy Code (IBC) of 2016 is a key law that deals with how companies in India handle financial troubles. This law sets up a clear process for helping businesses that can’t pay their debts. It aims to either get these companies back on their feet or, if that’s not possible, to close them down in a fair way.

The IBC introduces some important changes. It sets time limits for solving debt problems, which helps speed up the process. It also brings in new roles, like the resolution professional, who manages the process. The law gives more power to the people the company owes money to, letting them make important decisions.

This article will look at how the IBC works for companies that are in financial trouble. We’ll explain the steps involved in trying to save a company and what happens if it needs to be closed down. We’ll also talk about how this law affects businesses in India, including how it might change the way companies borrow money or how investors think about putting money into Indian businesses.

Key Elements under the Insolvency Resolution And Liquidation for Corporate Persons

1. Adjudicating Authority

The National Company Law Tribunal (NCLT) serves as the Adjudicating Authority for corporate insolvency resolution processes. This body, constituted under the Companies Act, 2013, plays a crucial role in overseeing and approving various aspects of the insolvency proceedings.

1. Insolvency Resolution Process

1. a) Initiation: The process can be initiated by financial creditors, operational creditors, or the corporate debtor itself through an application to the NCLT.
2. b) Insolvency Commencement Date: This is the date when the NCLT admits the application for initiating the corporate insolvency resolution process.
3. c) Resolution Professional: An insolvency professional is appointed to manage the affairs of the corporate debtor and oversee the resolution process.
4. d) Committee of Creditors: Comprising financial creditors, this committee plays a pivotal role in decision-making during the resolution process.
5. e) Information Memorandum: The resolution professional prepares this document, providing comprehensive information about the corporate debtor to potential resolution applicants.
6. f) Resolution Plan: Prospective resolution applicants submit plans for resolving the insolvency of the corporate debtor.

1. Time Frame

The insolvency resolution process is time-bound, typically lasting 180 days from the insolvency commencement date, with a possible extension of up to 90 days.

1. Interim Finance

Provisions exist for raising interim finance during the insolvency resolution process to maintain the corporate debtor as a going concern.

1. Moratorium

During the resolution process, a moratorium is imposed, prohibiting certain actions against the corporate debtor to maintain status quo.

1. Pre-packaged Insolvency Resolution Process

A newer addition to the framework, this process allows for a quicker, more streamlined approach to insolvency resolution, particularly suited for smaller businesses.

1. Liquidation

If the resolution process fails, the corporate debtor may enter liquidation. Key aspects include:

1. a) Liquidator: An insolvency professional appointed to oversee the liquidation process.
2. b) Liquidation Estate: Comprising the assets of the corporate debtor to be liquidated.
3. c) Distribution Waterfall: A predetermined order of priority for distributing proceeds from the liquidation.

1. Related Party Transactions

The Code provides detailed definitions of related parties in relation to corporate debtors, aiming to prevent potential conflicts of interest and ensure fair proceedings.

1. Resolution Applicant

This term refers to any person, individually or jointly, who submits a resolution plan following the invitation by the resolution professional.

1. Operational and Financial Creditors

The Code distinguishes between these two types of creditors, with different rights and roles in the insolvency process.

Initiation of Corporate Insolvency Resolution Process

The Corporate Insolvency Resolution Process (CIRP) is a crucial mechanism in India’s insolvency and bankruptcy framework, designed to address corporate defaults and provide a structured approach to resolving financial distress. This  section of the article delves into the intricacies of initiating a CIRP, exploring the key players involved and the procedures they must follow.

Who Can Initiate a CIRP?

The Insolvency and Bankruptcy Code allows three primary entities to initiate a CIRP:

1. Financial Creditors
2. Operational Creditors
3. The Corporate Debtor itself

Each of these entities follows a distinct process for initiating the CIRP, tailored to their specific role and relationship with the corporate debtor.

Initiation by Financial Creditors

Financial creditors, such as banks and financial institutions, can initiate a CIRP when a default occurs. The process involves:

1. Filing an application with the Adjudicating Authority (National Company Law Tribunal)
2. Furnishing evidence of default, typically from information utilities
3. Proposing a resolution professional to act as an interim resolution professional

It’s important to note that for certain classes of financial creditors, such as real estate allottees, there are specific requirements for filing a joint application. This ensures that a significant number of creditors support the initiation of the CIRP.

Initiation by Operational Creditors

Operational creditors, such as suppliers or service providers, follow a slightly different path:

1. Deliver a demand notice to the corporate debtor
2. Allow a 10-day period for the corporate debtor to respond
3. If no payment or notice of dispute is received, file an application with the Adjudicating Authority

The operational creditor must provide evidence of the debt, the demand notice, and confirmation of non-payment from financial institutions or information utilities.

Initiation by Corporate Debtors

A corporate debtor can initiate a CIRP against itself through a corporate applicant. This process requires:

1. Filing an application with the Adjudicating Authority
2. Providing information on books of accounts and other relevant documents
3. Furnishing details of the proposed resolution professional
4. Submitting a special resolution passed by shareholders or partners approving the filing

The Adjudication Process

Upon receiving an application, the Adjudicating Authority has 14 days to either admit or reject it. The decision is based on factors such as:

1. Completeness of the application
2. Evidence of default
3. Absence of any ongoing disciplinary proceedings against the proposed resolution professional

If admitted, the CIRP commences from the date of admission of the application.

Recent Developments and Exceptions

It’s worth noting that in response to the COVID-19 pandemic, the government introduced a temporary suspension on initiating CIRP for defaults arising on or after March 25, 2020. This measure was designed to provide relief to businesses affected by the economic disruptions caused by the pandemic.

Additionally, the law specifies certain entities that are not entitled to initiate a CIRP, including corporate debtors already undergoing a CIRP or pre-packaged insolvency resolution process, those who have completed a CIRP in the preceding 12 months, or entities against whom a liquidation order has been made.

Time Limits And Withdrawal under the Corporate Insolvency Resolution Process

Two key aspects of this process are the time frame for completion and the possibility of withdrawal. Let’s delve into these crucial elements as outlined in the Insolvency and Bankruptcy Code.

Time Frame for CIRP Completion

The CIRP is designed to be a time-bound process, striking a balance between swift resolution and thorough deliberation. The key points regarding the time frame are:

1. Initial Period: The CIRP must be completed within 180 days from the date of admission of the application.
2. Extension Possibility: An extension beyond 180 days can be requested by the resolution professional if instructed by the committee of creditors. This instruction must be passed by a vote of at least 66% of the voting shares.
3. Extension Approval: The Adjudicating Authority may grant an extension if satisfied that the complexity of the case warrants it. The extension cannot exceed 90 days.
4. One-Time Extension: It’s important to note that this extension can only be granted once.
5. Mandatory Completion Deadline: Regardless of extensions, the CIRP must be completed within 330 days from the insolvency commencement date. This includes any extensions granted and time taken in legal proceedings related to the resolution process.
6. Transition Provision: For cases pending at the time of the 2019 amendment, a 90-day period from the commencement of the amendment act was provided to complete the process.

Withdrawal of Application

The Code also provides for the possibility of withdrawing an application that has been admitted under sections 7, 9, or 10. The key points regarding withdrawal are:

1. Authority: The Adjudicating Authority has the power to allow the withdrawal of an admitted application.
2. Applicant’s Role: The withdrawal must be initiated by the original applicant.
3. Creditor Approval: A crucial requirement is the approval of 90% of the voting share of the committee of creditors.
4. Procedural Compliance: The withdrawal must be made in the manner specified by regulations.

Implications and Importance

The time frame provisions ensure that the CIRP doesn’t drag on indefinitely, providing certainty to all stakeholders. The strict deadlines encourage efficiency in the resolution process, which is crucial for maintaining the value of the distressed company and minimising disruption to its operations.

The withdrawal clause, on the other hand, provides flexibility in cases where circumstances change or where an out-of-court settlement becomes possible. However, the high threshold of creditor approval (90%) ensures that withdrawals are not made lightly and have broad consensus among creditors.

Moratorium And Public Announcement

In the context of corporate insolvency resolution, two crucial elements play a significant role in protecting the interests of the corporate debtor and ensuring a fair process: the declaration of moratorium and the public announcement. This section of the article explores these concepts as outlined in the Insolvency and Bankruptcy Code.

A. Declaration of Moratorium

The declaration of moratorium is a critical step in the corporate insolvency resolution process. It is initiated by the Adjudicating Authority after the admission of an application under sections 7, 9, or 10 of the Insolvency and Bankruptcy Code.

Key points regarding the declaration of moratorium:

1. The Adjudicating Authority issues an order declaring the moratorium.
2. This order is made simultaneously with the appointment of an interim resolution professional.
3. The moratorium period begins from the date of the order and continues until the completion of the corporate insolvency resolution process.
4. The moratorium can end earlier if the Adjudicating Authority approves a resolution plan or passes a liquidation order.

B. Effects of Moratorium

The moratorium serves to create a peaceful period during which the corporate debtor is protected from certain actions. The effects of the moratorium are wide-ranging:

1. Legal Proceedings: The moratorium prohibits the institution of new suits or the continuation of pending suits against the corporate debtor. This includes the execution of any judgement, decree, or order in any court of law, tribunal, arbitration panel, or other authority.
2. Asset Protection: The corporate debtor is prohibited from transferring, encumbering, alienating, or disposing of any of its assets or any legal or beneficial interest in such assets.
3. Security Enforcement: Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property is prohibited. This includes actions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
4. Property Recovery: Owners or lessors are prevented from recovering any property occupied by or in possession of the corporate debtor.
5. Essential Supplies: The supply of essential goods or services to the corporate debtor cannot be terminated, suspended, or interrupted during the moratorium period.
6. Critical Supplies: If the interim resolution professional or resolution professional considers certain supplies critical to protect and preserve the value of the corporate debtor, such supplies cannot be terminated, suspended, or interrupted, except in specific circumstances.
7. Licenses and Permits: Licenses, permits, registrations, quotas, concessions, clearances, or similar grants given by various authorities will not be suspended or terminated on the grounds of insolvency, provided current dues are paid.

It’s important to note that there are certain exceptions to the moratorium, such as transactions notified by the Central Government in consultation with financial sector regulators or other authorities.

C. Public Announcement Process

The public announcement is a crucial step in informing stakeholders about the initiation of the corporate insolvency resolution process. Key aspects of the public announcement process include:

1. Timing: The public announcement is made immediately after the appointment of the interim resolution professional.
2. Content: The public announcement must contain specific information, including:
   • Name and address of the corporate debtor
   • Name of the authority with which the corporate debtor is incorporated or registered
   • Last date for submission of claims
   • Details of the interim resolution professional
   • Penalties for false or misleading claims
   • The date on which the corporate insolvency resolution process shall close (180 days from the date of admission of the application)
3. Purpose: The public announcement serves to inform all stakeholders about the insolvency process and invite submission of claims.
4. Method: The manner of making the public announcement is specified in the regulations to ensure wide dissemination of the information.

The Role of Interim Resolution Professional in Corporate Insolvency

The Interim Resolution Professional (IRP) plays a crucial role in the corporate insolvency resolution process. This section of the article explores the key aspects of the IRP’s role, including appointment, management responsibilities, duties, and the need for cooperation from personnel.

A. Appointment and Tenure

The appointment of an Interim Resolution Professional is a critical first step in the corporate insolvency resolution process. Here are the key points regarding the appointment and tenure of an IRP:

1. Appointment Process: The IRP is appointed by the National Company Law Tribunal (NCLT) when it admits an application for initiating the corporate insolvency resolution process.
2. Eligibility: The IRP must be a registered insolvency professional with the Insolvency and Bankruptcy Board of India (IBBI).
3. Time Frame: The NCLT must appoint the IRP within 14 days from the insolvency commencement date.
4. Tenure: The IRP’s tenure typically lasts for 30 days or until the appointment of the Resolution Professional by the Committee of Creditors (CoC).
5. Extension: In some cases, the IRP may continue to act as the Resolution Professional if approved by the CoC.

B. Management of Corporate Debtor’s Affairs

Once appointed, the IRP takes over the management of the corporate debtor’s affairs. This involves:

1. Control and Custody: The IRP assumes control and custody of the corporate debtor’s assets and records.
2. Operations Management: The IRP is responsible for managing the day-to-day operations of the corporate debtor to ensure business continuity.
3. Financial Oversight: The IRP monitors and manages the financial position of the company, including cash flow and asset preservation.
4. Stakeholder Communication: The IRP acts as a bridge between the corporate debtor and its various stakeholders, including creditors, employees, and shareholders.
5. Legal Representation: The IRP represents and acts on behalf of the corporate debtor in legal proceedings.

C. Duties of Interim Resolution Professional

The IRP has several critical duties to perform during their tenure:

1. Public Announcement: Make a public announcement of the corporate insolvency resolution process and invite claims from creditors.
2. Collect Claims: Receive and collate all claims submitted by creditors.
3. Constitution of CoC: Constitute the Committee of Creditors and convene its first meeting.
4. Information Collection: Collect all information relating to the assets, finances, and operations of the corporate debtor for determining its financial position.
5. Asset Preservation: Take control and custody of any asset over which the corporate debtor has ownership rights.
6. Compliance Monitoring: Monitor the corporate debtor’s business operations and ensure compliance with applicable laws.
7. Filing Reports: File information collected with the information utility, if necessary.
8. Interim Finance: Take measures to protect and preserve the value of the corporate debtor’s property, including securing interim finance.

D. Cooperation from Personnel

The success of the insolvency resolution process heavily depends on the cooperation received by the IRP from the corporate debtor’s personnel:

1. Mandatory Cooperation: The personnel of the corporate debtor, including its promoters and any persons associated with the management, are legally obligated to extend all assistance and cooperation to the IRP.
2. Access to Information: The IRP must be provided with access to all relevant documents, records, and information related to the corporate debtor.
3. Operational Support: Employees and management must support the IRP in maintaining business continuity and day-to-day operations.
4. Financial Disclosures: All financial information and records must be accurately and promptly disclosed to the IRP.
5. Asset Information: Personnel must provide complete information about all assets of the corporate debtor, including those not in the company’s books.
6. Consequences of Non-cooperation: Failure to cooperate with the IRP can lead to penalties and legal consequences as per the Insolvency and Bankruptcy Code.

Management of Operations as Going Concern in Corporate Insolvency Resolution Process

In the realm of corporate insolvency resolution, one of the critical responsibilities of the interim resolution professional is to manage the operations of the corporate debtor as a going concern. 

The Primary Objective

The fundamental goal of the interim resolution professional is twofold:

1. To protect and preserve the value of the corporate debtor’s property
2. To manage the operations of the corporate debtor as a going concern

This dual objective ensures that the company’s assets are safeguarded while maintaining its operational continuity during the insolvency resolution process.

Powers and Authorities

To achieve these objectives, the interim resolution professional is vested with several important authorities:

1. Professional Appointments

The interim resolution professional has the power to appoint accountants, legal experts, or other professionals as deemed necessary. This ensures that the corporate debtor has access to specialized expertise during this critical period.

2. Contract Management

The authority extends to entering into new contracts on behalf of the corporate debtor. Additionally, the interim resolution professional can amend or modify existing contracts or transactions that were in place before the commencement of the corporate insolvency resolution process.

3. Interim Finance

One of the most significant powers is the ability to raise interim finance. However, this comes with a crucial caveat: no security interest can be created over any encumbered property of the corporate debtor without prior consent from the creditors whose debt is secured by such property. An exception to this rule exists when the value of the property is at least twice the amount of the debt, in which case prior consent is not required.

4. Personnel Management

The interim resolution professional has the authority to issue instructions to the corporate debtor’s personnel. This power is essential for maintaining the company’s operations and ensuring it continues as a going concern.

5. Comprehensive Action

A catch-all provision empowers the interim resolution professional to take any and all actions necessary to keep the corporate debtor operating as a going concern.

Implications and Importance

The management of operations as a going concern is crucial for several reasons:

1. Value Preservation: By keeping the company operational, the overall value of the business is maintained, potentially leading to better outcomes for all stakeholders.
2. Employment Protection: Continuing operations helps preserve jobs, which is beneficial both socially and economically.
3. Creditor Interests: Operating as a going concern may increase the chances of recovery for creditors, as opposed to a liquidation scenario.
4. Restructuring Opportunities: Maintaining operations provides more options for potential restructuring or sale of the business as a whole.

Committee of Creditors

In the complex landscape of corporate insolvency resolution, the Committee of Creditors (CoC) stands as a cornerstone institution, wielding significant influence over the fate of distressed companies. This section of the article provides an extensive examination of the CoC, delving into its formation, composition, functions, and the intricate dynamics of its operations.

A. Formation and Composition of the Committee of Creditors

The genesis of the Committee of Creditors marks a critical juncture in the corporate insolvency resolution process. This section explores the nuances of its formation and the intricacies of its composition.

Formation Process

1. Initiation: The formation of the CoC is set in motion by the interim resolution professional, a key figure appointed at the outset of the insolvency proceedings.
2. Claim Collation: The interim resolution professional embarks on a meticulous process of collating all claims against the corporate debtor. This encompasses a wide array of creditors, from financial institutions to operational creditors.
3. Financial Position Assessment: Concurrent with claim collation, a comprehensive assessment of the corporate debtor’s financial position is undertaken. This step is crucial in understanding the full extent of the company’s financial obligations and assets.
4. Constitution: Upon completion of these preliminary steps, the interim resolution professional formally constitutes the Committee of Creditors.

Composition Dynamics

1. Primary Composition: The CoC primarily comprises all financial creditors of the corporate debtor. This includes banks, financial institutions, and other entities that have extended financial credit to the company.
2. Exclusions and Exceptions:
   • Related Party Exclusion: In a move to ensure impartiality, related parties of the corporate debtor are expressly excluded from representation, participation, or voting in CoC meetings.
   • Regulatory Exception: An important exception exists for financial creditors regulated by financial sector regulators. These entities may participate in the CoC even if they are related parties, provided this relationship arose solely due to debt conversion or substitution prior to the commencement of insolvency proceedings.
3. Voting Share Determination: The influence of each financial creditor within the CoC is not uniform. Instead, it is proportionally determined based on the quantum of financial debt owed to them by the corporate debtor.
4. Consortium Lending Scenarios: In cases where multiple financial creditors have extended credit as part of a consortium or syndicate, each member of the consortium becomes part of the CoC. Their voting rights are allocated in proportion to their share of the total debt extended by the consortium.
5. Dual Creditor Status: The composition rules make a nuanced provision for entities that are both financial and operational creditors to the same corporate debtor:
   • Such entities are included in the CoC, but only to the extent of their financial debt.
   • For the portion of debt classified as operational, they are considered operational creditors, which affects their rights and position in the insolvency process.
6. Operational Creditor Representation: While not formal members of the CoC, operational creditors with significant dues (typically 10% or more of the total debt) are given notice of CoC meetings and may attend, albeit without voting rights.

The formation and composition of the CoC thus reflect a carefully balanced approach, designed to ensure that those with the most significant financial stakes in the corporate debtor have a proportional say in the resolution process, while also providing mechanisms for broader stakeholder participation.

B. Appointment of Resolution Professional

The transition from the interim resolution professional to the resolution professional is a pivotal moment in the insolvency resolution process. This section elucidates the intricate procedure and considerations involved in this crucial appointment.

The Decision-Making Process

1. First Meeting Significance: The inaugural meeting of the CoC, mandated to be held within seven days of its constitution, serves as the forum for this critical decision.
2. Options Before the CoC: The committee faces a binary choice: a) To continue with the services of the interim resolution professional, elevating their role to that of the resolution professional. b) To replace the interim professional with a new individual to serve as the resolution professional.
3. Voting Threshold: This decision is not taken lightly. It requires a substantial majority – a vote of at least 66% of the voting share of financial creditors. This high threshold ensures that the appointment has broad support among the creditors.

Procedure for Appointment

1. Continuation Scenario: If the CoC decides to retain the interim resolution professional, a straightforward communication process ensues:
   • The decision is communicated to the interim resolution professional.
   • The corporate debtor is notified.
   • The Adjudicating Authority is informed of the decision.
2. Replacement Scenario: The process becomes more involved if the CoC opts for a new resolution professional:
   • The CoC must file a formal application with the Adjudicating Authority.
   • This application must include the name of the proposed resolution professional.
   • Crucially, it must be accompanied by a written consent from the proposed professional, submitted in a specified form.
3. Regulatory Oversight: The Adjudicating Authority doesn’t act unilaterally on this recommendation:
   • The proposed name is forwarded to the Insolvency and Bankruptcy Board of India (IBBI) for confirmation.
   • This step ensures that the proposed professional meets all regulatory requirements and standards.
4. Final Appointment: The Adjudicating Authority makes the final appointment only after receiving confirmation from the IBBI.
5. Contingency Plan: In cases where the IBBI does not confirm the proposed name within ten days:
   • The Adjudicating Authority is empowered to direct the interim resolution professional to continue in the role.
   • This continuation is until such time as the IBBI confirms the appointment of the proposed resolution professional.

This meticulous process for appointing the resolution professional underscores the importance of this role in the insolvency resolution process. It ensures that the individual stepping into this crucial position has the confidence of the creditors and meets the stringent standards set by the regulatory authorities.

C. Duties of Resolution Professional

The resolution professional stands at the helm of the corporate insolvency resolution process, shouldering a multitude of responsibilities that are critical to the successful navigation of this complex procedure. This section provides an in-depth exploration of the varied and crucial duties entrusted to the resolution professional.

Overarching Responsibilities

1. Process Stewardship: The resolution professional is tasked with conducting the entire corporate insolvency resolution process. This overarching duty encompasses a wide range of activities, from the initial stages of claim verification to the final presentation of resolution plans.
2. Operational Management: During the insolvency resolution period, the resolution professional assumes the mantle of managing the operations of the corporate debtor. This responsibility ensures business continuity and preserves the company’s value as a going concern.

Specific Duties and Actions

1. Asset Custody and Control:
   • The resolution professional must take immediate custody and control of all assets belonging to the corporate debtor.
   • This includes physical assets as well as intangible assets like intellectual property.
   • Importantly, it also encompasses the business records of the corporate debtor, which are crucial for understanding the company’s financial position and operational history.
2. Legal Representation:
   • Acting as the face of the corporate debtor, the resolution professional represents the company in various legal forums.
   • This includes representation in judicial, quasi-judicial, and arbitration proceedings.
   • The professional is empowered to exercise rights on behalf of the corporate debtor, always with the aim of benefiting the company and its stakeholders.
3. Financial Management:
   • A critical aspect of the role involves raising interim finances.
   • This action, however, is subject to the approval of the Committee of Creditors, as stipulated under Section 28 of the Insolvency and Bankruptcy Code.
   • Such interim financing is often crucial for maintaining the company’s operations during the resolution process.
4. Professional Appointments:
   • The resolution professional has the authority to appoint various professionals as needed.
   • This includes accountants, legal experts, and other specialists.
   • These appointments must be made in accordance with the manner specified by the Insolvency and Bankruptcy Board of India.
5. Claims Management:
   • Maintaining an updated list of claims is a continuous and crucial duty.
   • This involves regular updates as new claims are submitted, verified, or modified.
6. Committee of Creditors Liaison:
   • The resolution professional is responsible for convening all meetings of the Committee of Creditors.
   • Attendance at these meetings is mandatory, serving as a bridge between the CoC and the insolvency resolution process.
7. Information Memorandum Preparation:
   • A key document in the resolution process is the information memorandum.
   • The resolution professional is tasked with preparing this comprehensive document in accordance with Section 29 of the Code.
   • This memorandum provides potential resolution applicants with essential information about the corporate debtor.
8. Resolution Plan Management:
   • The professional plays a crucial role in the resolution plan process:
     • Inviting prospective resolution applicants to submit plans.
     • Setting criteria for these applicants, with CoC approval.
     • Presenting all received resolution plans at CoC meetings.
9. Transactional Scrutiny:
   • The resolution professional must file applications for avoidance of transactions if any are identified.
   • This responsibility, outlined in Chapter III of the Code, is crucial for addressing any preferential, undervalued, or fraudulent transactions that may have occurred prior to the insolvency process.
10. Regulatory Compliance:
    • Beyond these specific duties, the resolution professional must undertake any other actions as specified by the Insolvency and Bankruptcy Board of India.
    • This catch-all provision ensures that the professional remains responsive to evolving regulatory requirements and best practices.

The duties of the resolution professional are both extensive and intensive, requiring a blend of financial acumen, legal knowledge, operational management skills, and diplomatic finesse. By fulfilling these multifaceted responsibilities, the resolution professional plays a pivotal role in steering the corporate debtor through the choppy waters of insolvency towards a potential resolution.

D. Meetings of Committee of Creditors

The meetings of the Committee of Creditors serve as the crucible where key decisions in the corporate insolvency resolution process are forged. This section provides a detailed examination of the mechanics, protocols, and significance of these crucial gatherings.

Meeting Logistics and Conduct

1. Flexibility in Meeting Format:
   • Recognizing the need for efficiency and accessibility, the law provides for flexibility in how CoC meetings are conducted.
   • Meetings can be held in person, allowing for face-to-face interactions and discussions.
   • Alternatively, they can be conducted through electronic means, as specified by the relevant authorities. This provision is particularly valuable in ensuring participation regardless of geographical constraints.
2. Role of Resolution Professional:
   • The resolution professional plays a central role in these meetings.
   • They are responsible for conducting all meetings of the CoC.
   • This involves setting the agenda, moderating discussions, and ensuring that all procedural requirements are met.

Notification and Attendance

1. Comprehensive Notification:
   • The resolution professional must give notice of each CoC meeting to a broad range of stakeholders: a) All members of the Committee of Creditors. b) Authorized representatives of financial creditors, as applicable. c) Members of the suspended Board of Directors or partners of the corporate debtor. d) Operational creditors or their representatives, but only if their aggregate dues amount to at least 10% of the total debt.
2. Attendance Rights and Limitations:
   • While notification is broad, attendance rights are more nuanced:
     • CoC members and their authorized representatives have full rights to attend.
     • Directors, partners, and representatives of operational creditors may attend but do not have voting rights.
   • Importantly, the absence of directors, partners, or operational creditor representatives does not invalidate the proceedings of the meeting.

Representation and Voting

1. Professional Representation Option:
   • Any creditor who is a CoC member has the right to appoint an insolvency professional to represent them in meetings.
   • This professional must be different from the resolution professional.
   • The fees for such representation are borne by the creditor appointing the professional.
2. Voting Mechanism:
   • Each creditor’s voting power is not uniform but is instead based on their voting share.
   • The voting share is assigned based on the financial debts owed to the creditor by the corporate debtor.
   • The resolution professional is tasked with determining the voting share of each creditor, following the manner specified by the Insolvency and Bankruptcy Board.
3. Voting Process:
   • The actual process of voting in CoC meetings is conducted in a manner specified by the Board.
   • This ensures a standardized and transparent approach to decision-making across different insolvency cases.

Significance of CoC Meetings

1. Decision-Making Forum: These meetings serve as the primary venue for making critical decisions that shape the course of the insolvency resolution process.
2. Information Exchange: They provide a platform for the resolution professional to update creditors on the progress of the resolution process and for creditors to seek clarifications.
3. Resolution Plan Evaluation: CoC meetings are where resolution plans are presented, discussed, and eventually voted upon.
4. Creditor Coordination: These gatherings allow creditors to coordinate their approaches and strategies, potentially leading to more efficient resolution outcomes.

The meetings of the Committee of Creditors are thus not mere procedural formalities but are the beating heart of the corporate insolvency resolution process. They embody the collective will and wisdom of the creditors, guided by the expertise of the resolution professional, in charting the course for the distressed company’s future.

E. Rights and Duties of Authorized Representative of Financial Creditors

In certain complex insolvency scenarios, particularly those involving a large number of financial creditors or specific classes of creditors, the role of an authorized representative becomes crucial. This section delves into the rights and duties of these authorized representatives, highlighting their pivotal role in balancing individual creditor interests with efficient decision-making.

Appointment and Scope

1. Scenarios for Appointment:
   • Authorized representatives are appointed in specific situations: a) When financial debt is in the form of securities or deposits, and the terms provide for trustee or agent representation. b) For a class of creditors exceeding a specified number. c) In cases where a guardian, executor, or administrator represents financial creditors.
2. Representation Scope:
   • The authorized representative acts on behalf of multiple financial creditors.
   • Their role spans participation in CoC meetings and voting on critical decisions.

Rights of the Authorized Representative

1. Participation Rights:
   • The authorized representative has the right to participate in all meetings of the Committee of Creditors.
   • This participation extends to discussions, deliberations, and the decision-making process.
2. Voting Rights:
   • Crucially, the representative holds the right to vote in CoC meetings.
   • This voting right is exercised on behalf of the financial creditors they represent.
   • The voting must be in accordance with the prior instructions received from the represented creditors.
3. Information Access:
   • By virtue of their role, authorized representatives have access to all relevant information discussed in CoC meetings.
   • This access is crucial for informed decision-making and effective representation of creditor interests.

Duties of the Authorised Representative

1. Information Dissemination:
   • A primary duty is to circulate the agenda of CoC meetings to all financial creditors they represent.
   • Post-meeting, they must also circulate the minutes to ensure all represented creditors are kept informed of proceedings and decisions.
2. Faithful Representation:
   • The representative has a fiduciary duty to act in the best interests of the financial creditors they represent.
   • They must not act against the interests of these creditors under any circumstances.
3. Instruction Adherence:
   • All actions, particularly voting, must be in strict accordance with the prior instructions received from the represented creditors.
   • These instructions may be obtained through physical or electronic means.
4. Voting Procedure:
   • In cases where the representative represents multiple financial creditors:
     • Votes must be cast separately for each creditor.
     • Each vote must align with the specific instructions received from that particular creditor.
   • If a creditor does not provide prior instructions, the representative must abstain from voting on their behalf.
5. Special Voting Scenarios:
   • For certain decisions, such as voting on an application under Section 12A of the Code, specific voting rules apply.
   • In these cases, the representative must adhere strictly to the provisions of sub-section (3) of Section 25A.
6. Record Keeping and Transparency:
   • The authorized representative must maintain clear records of all instructions received from creditors.
   • They are duty-bound to file these instructions with the CoC to ensure transparency and accountability.
7. Ensuring Accurate Recording:
   • It is the representative’s responsibility to ensure that the interim resolution professional or resolution professional correctly records the voting instructions of each financial creditor they represent.
   • This duty is crucial for maintaining the integrity of the voting process and ensuring that each creditor’s voice is accurately reflected in CoC decisions.
8. Balancing Collective and Individual Interests:
   • In scenarios where the authorized representative acts for a class of creditors under sub-section (6A) of section 21, they face a unique challenge:
     • They must cast their vote on behalf of all financial creditors they represent based on a majority decision.
     • This majority is determined by a vote of more than 50% of the voting share of the financial creditors who have cast their vote.
   • However, this majority rule doesn’t apply to voting on applications under section 12A, where individual creditor instructions must be followed.

Significance of the Authorized Representative Role

1. Efficiency in Large Creditor Scenarios:
   • The role streamlines the decision-making process in cases with numerous financial creditors, preventing potential deadlocks or delays.
2. Protection of Minority Interests:
   • While operating on majority decisions in many cases, the role also ensures that individual creditor voices are not entirely subsumed, particularly in crucial decisions like those under section 12A.
3. Information Bridge:
   • Acting as a conduit of information between the CoC and the represented creditors, the authorized representative ensures all stakeholders remain informed throughout the insolvency resolution process.
4. Specialized Representation:
   • The role allows for representation by individuals with expertise in insolvency matters, potentially leading to more informed participation in the CoC proceedings.
5. Balancing Act:
   • The authorized representative must delicately balance the collective interests of the creditor class they represent with the individual instructions of each creditor, embodying the complex nature of group decision-making in insolvency scenarios.

Transactions And Resolution Process

The four key aspects of the Transaction And Resolution Process under the corporate insolvency resolution process involves avoidance of transactions, replacement of resolution professionals, actions requiring committee approval, and preparation of information memorandums.

A. Application for Avoidance of Transactions

During a corporate insolvency resolution process, the resolution professional may file an application to avoid certain transactions. This step is crucial for protecting the interests of creditors and maintaining the integrity of the process. Importantly, the filing of such an application does not halt or affect the ongoing insolvency proceedings. This provision ensures that the resolution process continues smoothly while potentially problematic transactions are addressed separately.

B. Replacement of Resolution Professional

The committee of creditors plays a vital role in overseeing the insolvency process, including the power to replace the resolution professional if deemed necessary. Here’s how it works:

1. The committee can decide to replace the resolution professional at any time during the process.
2. A vote requiring 66% of voting shares is needed to approve the replacement.
3. The committee proposes a new resolution professional to the Adjudicating Authority.
4. The Adjudicating Authority forwards the proposed name to the Insolvency and Bankruptcy Board for confirmation.
5. The new resolution professional is then appointed following the same procedure as the initial appointment.

This process ensures that the committee of creditors has a say in who manages the insolvency process, while also maintaining proper oversight and approval channels.

C. Actions Requiring Committee Approval

To safeguard the interests of all parties involved, certain actions by the resolution professional require prior approval from the committee of creditors. These actions include:

1. Raising interim finance above a specified amount
2. Creating security interests over the corporate debtor’s assets
3. Changing the capital structure of the corporate debtor
4. Modifying ownership interests
5. Instructing financial institutions for significant debit transactions
6. Undertaking related party transactions
7. Amending constitutional documents
8. Delegating authority
9. Disposing of shares to third parties
10. Changing management of the corporate debtor or its subsidiary
11. Transferring rights or debts under material contracts
12. Modifying terms of employment for key personnel
13. Changing appointment or terms of statutory or internal auditors

Any action taken without the required approval (66% of voting shares) is considered void. This provision ensures that major decisions during the insolvency process are made collectively and with proper consideration.

D. Preparation of Information Memorandum

A crucial part of the resolution process is the preparation of an information memorandum by the resolution professional. This document contains all relevant information necessary for formulating a resolution plan. Key points include:

1. The memorandum must follow the form and manner specified by the Insolvency and Bankruptcy Board.
2. Resolution applicants are granted access to this information, both in physical and electronic form.
3. Applicants must agree to comply with confidentiality laws, protect the corporate debtor’s intellectual property, and not share information with unauthorized third parties.
4. The information provided includes the corporate debtor’s financial position, details of disputes, and any other pertinent matters specified by the Board.

This comprehensive information sharing ensures that potential resolution applicants have all the necessary data to create viable resolution plans, while also protecting the corporate debtor’s sensitive information.

Resolution Plan in Corporate Insolvency

The three key aspects of resolution plans: eligibility to be a resolution applicant, submission of the plan, and the approval process.

A. Eligibility to Be a Resolution Applicant

Not everyone can submit a resolution plan. The law sets out specific criteria to ensure that only qualified and trustworthy individuals or entities can participate in the process:

1. Disqualifications: Certain individuals are automatically disqualified, including:
   • Undischarged insolvents
   • Wilful defaulters
   • Those with non-performing assets (with some exceptions)
   • Individuals convicted of certain offenses
   • Those disqualified as company directors
   • Individuals prohibited from trading in securities
2. Corporate Conduct: Persons involved in preferential, undervalued, extortionate credit, or fraudulent transactions in a corporate debtor are generally disqualified.
3. Guarantors: Those who have given guarantees for the corporate debtor and haven’t paid when the guarantee was invoked are ineligible.
4. Connected Persons: The eligibility criteria also extend to “connected persons,” which includes promoters, management, and related parties of the resolution applicant.
5. Exceptions for Financial Entities: There are some exceptions for financial entities like banks, registered foreign investors, and asset reconstruction companies.

B. Submission of Resolution Plan

Once eligibility is established, the resolution plan can be submitted:

1. Preparation: The resolution applicant prepares the plan based on the information memorandum provided.
2. Affidavit: The plan must be accompanied by an affidavit stating the applicant’s eligibility under Section 29A.
3. Content Requirements: The plan must include:
   • Provisions for insolvency resolution process costs
   • Payment arrangements for operational creditors
   • Management plans for the corporate debtor post-approval
   • Implementation and supervision details
4. Legal Compliance: The plan must not contravene any existing laws and should meet any other requirements specified by the Insolvency and Bankruptcy Board.
5. Presentation to Committee: The resolution professional presents eligible plans to the committee of creditors.

C. Approval of Resolution Plan

The final stage is getting the plan approved:

1. Committee of Creditors: The plan needs approval from at least 66% of the voting share of financial creditors.
2. Considerations: The committee considers the plan’s feasibility, viability, and proposed distribution manner.
3. Adjudicating Authority: Once approved by the committee, the plan goes to the Adjudicating Authority for final approval.
4. Binding Nature: If approved, the plan becomes binding on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders.
5. Implementation: The resolution applicant must obtain necessary approvals under applicable laws within one year of the plan’s approval.
6. Effects of Approval: Upon approval, the moratorium on the corporate debtor ceases, and records of the process are forwarded to the Insolvency and Bankruptcy Board.

Appeal And Liability under Corporate Resolution

In the complex world of corporate insolvency, two crucial aspects often come into play: the appeal process and the liability for prior offences. This section of the article aims to simplify these concepts and explain their implications for businesses undergoing insolvency proceedings.

A. Appeal Process

When a resolution plan is approved during a corporate insolvency process, not everyone may agree with the decision. In such cases, the law provides a mechanism for appeal. Here’s what you need to know:

1. Grounds for Appeal: Any appeal against an order approving a resolution plan must be based on the grounds specified in sub-section (3) of section 61 of the Insolvency and Bankruptcy Code.
2. Procedure: The appeal process follows a specific manner as laid out in the same section of the Code.
3. Purpose: This provision ensures that stakeholders have a way to challenge decisions they believe are unfair or incorrect, adding a layer of checks and balances to the insolvency resolution process.

B. Liability for Prior Offenses

One of the most significant aspects of the insolvency process is how it deals with offenses committed by the corporate debtor before the insolvency proceedings began. The law provides certain protections to facilitate the resolution process:

1. Cessation of Liability:
   • Once a resolution plan is approved by the Adjudicating Authority, the corporate debtor’s liability for offenses committed before the insolvency process began comes to an end.
   • The corporate debtor cannot be prosecuted for these offenses from the date of approval of the resolution plan.
2. Conditions for Liability Cessation:
   • This protection applies only if the resolution plan results in a change in management or control of the corporate debtor.
   • The new management should not include: a) Former promoters or related parties b) Persons suspected by investigating authorities of abetting or conspiring in the offense
3. Ongoing Prosecutions:
   • If a prosecution was already underway during the insolvency process, it will be discharged once the resolution plan is approved, subject to meeting the above conditions.
4. Continued Liability for Individuals:
   • Despite the protection for the corporate entity, certain individuals remain liable for prosecution:
     • Designated partners (in case of LLPs)
     • Officers in default (as defined in the Companies Act)
     • Persons in charge of or responsible for the corporate debtor’s business
     • Those directly or indirectly involved in the commission of the offense
5. Protection of Property:
   • No action can be taken against the corporate debtor’s property for offenses committed before the insolvency process, if the property is covered under the approved resolution plan.
   • This protection applies when there’s a change in control or sale of liquidation assets to a person not related to the former management or suspected of involvement in the offense.
6. Assistance to Investigations:
   • Despite these protections, the corporate debtor and related persons must cooperate with any ongoing investigations into offenses committed before the insolvency process began.