A company is announced insolvent if it is unable to pay its creditors’ debts. There are two methods for determining corporate insolvency:
- The cash-flow test determines whether the corporation is presently or will be unable to pay its obligations when they become due.
- The balance sheet test determines if the valuation of the company’s assets is less than the amount of debts, including future liabilities.
The Corporate Insolvency Resolution Process
Debt repayment has grown to be a significant concern in the prevailing economic conditions. As a result, the Insolvency and Bankruptcy Code has emerged as a rescue. This Code contains provisions for filing for insolvency and bankruptcy on behalf of sole proprietors, partnership firms, limited liability companies, and corporations. Each category has a minimum default amount set out by the Code. Considering economic fluctuations, the government must notify the public of the final amount as the threshold at which the procedure will begin. Please note that the set amount is not the minimum or maximum amount of debt default; instead, it’s more of a range.
Eligibility Criteria For CIRP
People falling under the following criteria are eligible to initiate a resolution as per the CIRP:
- Financial Creditors
Any individual liable for business debt or to whom such a sum has been lawfully allocated or transferred is referred to as a financial creditor. Financial institutions, including banks, are an example of this.
- Operational Creditors
Anyone owing them an operational debt or to whom such amount has been explicitly assigned or transferred in consideration of any products or services they have provided. For example, employees, suppliers, and other stakeholders.
- Corporate Persons
Anybody who is a corporate debtor, a member or partner of a corporate debtor who is authorised to submit an application, a person in charge of the corporate debtor’s financial as well as other operations and resources.
Steps To File For CRIP
Following are the steps to follow when filling an application of CRIP for either the liquidation or resolution with the Nationals Company Law Tribunal.
Step 1: Apply to the NCLT
The NCLT application process is open to both the company’s operational and financial creditors. It is used to enrol the corporate debtor in the corporate insolvency resolution process. To get admitted, creditors must show the default of debt worth more than one lakh rupees. Additionally, the NCLT must provide a decision within 14 days, either approving or rejecting the application.
When submitting applications before the NCLT, financial and operational creditors have different conditions to fulfil. First, a financial creditor must provide a record of the default. During this step, a new category of record keeping organisation known as ‘’Information Utilities’’ is established by the IBC.
On the contrary, an operational creditor must first issue a claim for his due debt. Then, depending upon the grounds of an ongoing dispute, the corporate debtor has the option to defend the claim.
Step 2: Moratorium and CRIP
The board of directors is suspended when a corporate debtor is accepted to the CIRP. Additionally, the management is supervised by a neutral “interim resolution professional.” The administration has no further influence over corporate matters from this point on or during the CIRP.
In addition, a moratorium is put into place that explicitly prohibits:
- Continuing or initiating any new legal proceedings against the corporate debtor
- Transfer of the company debtor’s assets
- Enforcement of any security interests
- Taking any property from the corporation
- Suspension or termination of the delivery of necessary goods and services.
However, major business contracts signed by the corporate debtor are not covered under the moratorium.
Step 3: Claim verification and categorisation
In this process, the interim resolution professional will invite, verify, and categorise claims submitted by the corporate debtor’s creditors. The Committee of Creditors, or COC, made up of all the corporate debtor’s financial creditors, must then be formed within 30 days after the admittance into CIRP.
Step 4: Assigning the resolution professional
The COC picks an impartial individual to serve as the “insolvency professional” for the remaining time under the CIRP. The insolvency professionals can be the same person as the interim resolution professional, depending on the COC’s wishes.
Step 5: Approval of the Resolution Plan
Within 180 days after CRIPS start, creditors must authorise a resolution plan for the company’s reconstruction. Such a resolution plan may be proposed by anybody, including management, creditors, or a third-party entity. Verifying that the plan meets the requirements outlined in the bankruptcy and insolvency code is the responsibility of the resolution expert.
When it comes to grievance redressal mechanism in the event of a default, the corporate insolvency resolution process, an integral component of the Insolvency and Bankruptcy Code, 2016, has ushered in a brand-new era of the insolvency proceedings and made it easier to do business in the diverse sectors of India.