Insolvency Resolution Process for Individuals & Partnership Firms
The Corporate Insolvency Resolution Process (CIRP) must be accomplished within 330 days of the insolvency commencement date, along with any extension of the time frame of the corporate insolvency resolution process approved under Section 12 of the Insolvency Code and the time taken in legal proceedings in relation to such resolution process of the corporate debtor – second proviso to Section 12 of the Insolvency Code.
The Insolvency and Bankruptcy Code 2016 recently completed its second anniversary successfully. In these two years, the harvests through the IBC process proved to be extremely satisfactory. The entire scenario of the debtor-creditor relationship changed after the implementation of the Code.
After the enforcement of the Code, the creditors are not required to chase the debtor but it’s the debtor who chases the creditors. After the entry of the code, the NCLT has become a trusted forum with high credibility.
With the coming of Code into execution, numerous cases commenced to be filed before NCLT due to NCLT became overcrowded and therefore seeing an alarming situation the capacity of NCLT was further enhanced within due time, and matters under this legislation were disposed off expeditiously in a time-bound manner.
The sparkling statistics of the two successful years themselves portray the future of the Code. To highlight the success story as of now 1,322 cases have been admitted by NCLT. Around 4,452 cases have been disposed off at the pre-admission stage and 66 cases have been resolved after adjudication of these cases.
Of the 66 cases that were resolved after adjudication the realisation achieved was 80,000 crore. By having a glance at the NCLT database, of the 4,452 cases that were disposed off at the pre-admission stage, the amount successfully settled was around 2,02 lakh crores.
The success story does not end here. Some of the big cases like Bhushan Power and Steel Limited; Essar Steel India Limited are under progressing stages and are likely to be resolved in this financial year with hopeful realization of approx. 70,000 crore.
The IBC has a very clear demarcation in respect of the audience it seeks to cover within its umbrella. According to the code has aligned separate Adjudicating authorities to take and resolve matters that fall within their ambit. On this note, the adjudicating authority empowered to handle and resolve cases related to defaults by individuals and partnership firms is the Debt Recovery Tribunal (DRT).
The Code contains provisions for Insolvency & Bankruptcy of individuals and partnership firms in Part III. The provisions and process are designed keeping into account the need of the hour thereby providing a remedy in a time-bound manner. Even though provisions have been drafted for the same but they are not being looked up to but other remedial measures are resorted to for seeking remedy against individuals and partnership firms.
In light of the above, the process flow along with the relevant provisions related to the insolvency of individuals and partnership firms are enshrined in chapter III of part III of the Code. The provisions of the insolvency resolution process for individuals & partnerships are similar to that of the corporate insolvency resolution process for corporate persons.
The major point of difference between the insolvency proceedings of corporate persons and individuals & partnership firm is that the application by corporate persons is filed with NCLT whereas application by individuals & partnership firms is filed with DRT.
Another point of difference is that corporate insolvency creditors are bifurcated under two categories i.e. financial creditors and operational creditors whereas there is no bifurcation of creditors in the case of insolvency for individuals & partnership firms.
The application for insolvency resolution may be filed by the creditor or the concerned debtor himself. Once an application is filed with DRT for initiating insolvency proceedings a Resolution professional shall be appointed to carry forward and supervise the entire process as prescribed in this chapter.
The resolution professional after being duly appointed shall verify the application as submitted by the debtor or creditor for initiating the insolvency process. Once the resolution professional is through with the examination of the submitted application he shall thereafter compile a report suggesting the admission or rejection of the application as submitted to the adjudicating authority.
The Adjudicating Authority shall on the basis of the received report decide whether to admit or reject the application as was initially submitted to it by the debtor or creditor. Once insolvency proceedings are ordered to be initiated by the DRT, a moratorium period shall commence and thereafter seize to be in effect at the end of one hundred and eighth day.
The resolution professional shall play a crucial and significant role in driving and carrying forward the insolvency professional on behalf of the individual or partnership firm. On this note the resolution professional shall in the execution of this process invite claims from the creditors via public notice; after receipt of claims compile a list of creditors; chalk out the repayment plan; submit report on the received repayment plan, and thereafter obtaining approval by creditors and confirmation from DRT on the same.
The resolution professional shall also play an active role in implementing and monitoring the repayment plan thereby ensuring completion of the adopted repayment plan. The resolution professional is the sole commander and controller of the insolvency process.
Having gained a brief insight into the insolvency resolution process for individuals & partnership firms now let’s head toward gaining a detailed glance of the insolvency resolution process as prescribed for individuals and partnership firms.
Who can file an application
An application for initiating insolvency proceeding in respect to individuals and partnership firms may be made by the creditor in an individual capacity, in consortium with other creditors, or via resolution professional. The concerned debtor may also opt for initiating insolvency proceedings in favor of himself by filling an application personally or via the resolution professional.
The concerned debtor may by invoking Section 94 of the Code file an application for initiating insolvency proceedings in respect of himself. The application may either be submitted personally by the concerned debtor or through the resolution professional.
In the scenario where the debtor is a partner of a firm then in such a situation, the concerned debtor may make an application for initiating insolvency proceedings with the approval of all or majority partners. While making an application for initiating insolvency proceedings, the concerned debtor is required to comply with the perquisites thereafter he becomes eligible for making an application for initiating the insolvency proceedings. The prerequisites that need to be compiled prior to making an application are as follows:
- The debtor should not be an undischarged bankrupt;
- The debtor should be undergoing a fresh start process in relation to his debts;
- No insolvency resolution proceedings should be in process in relation to the debts against the debtor;
- The debtor should not be undergoing bankruptcy proceedings
- No insolvency resolution proceedings should have been admitted during the preceding twelve months to be counted from the date on which a fresh application is filed for invoking the insolvency resolution process.
Once the above-mentioned prerequisites are satisfied, the debtor becomes eligible to file an application for initiating insolvency proceedings.
A creditor for initiating insolvency resolution process in respect of individuals & partnership firm may make an application for the same either by himself, through a consortium with other creditors, or through a resolution professional. In the scenario where the debtor is a partnership firm then the creditor can make an application against either of the partners of the firm.
The application as made by the creditor(s) shall contain the required attachments as are prescribed in the Code. The creditor shall also furnish a copy of the application as filed to the debtor for hid reference. The creditor shall while making the application ensure that the application is in the appropriate format as prescribed in the Code.
On an application being filed by either of the aforesaid, an interim moratorium shall come into force from the date on which application for initiating insolvency proceedings is made and thereafter shall cease to have an effect on the date of admission of the application by DRT.
During the period of interim moratorium neither any legal action nor pending proceedings shall be in execution nor can the creditor initiate any fresh legal action against the debtor. In the scenario where the debtor is a partnership firm then in such a situation, the interim moratorium shall be applicable against all the partners of the firm.
Appointment of Resolution Professional
The Resolution professional is the key person in the insolvency resolution process. He may be said to be the driver of the entire proceedings that fall within the ambit of the insolvency resolution process. the resolution professional may be appointed by undergoing either of the following:
Pre-existing Resolution Professional
There may be scenarios where an application for initiating insolvency resolution process is filed by the Resolution Professional on behalf of the debtor or creditor as the case may be. Under this state the adjudicating authority i.e. DRT shall direct the board (IBBI) to verify that as of date there is no disciplinary proceeding pending against the proposed resolution professional. The verification shall be directed to be conducted by the board within a period of seven days from the date of receipt of the application. The board shall on receipt of direction report its decision i.e. recommending appointment or rejection of resolution professional to the directing adjudicating authority within seven days of receipt of direction.
In the cases where an application for initiating insolvency proceedings is filed by the debtor or creditor without the involvement of a resolution professional then in such a situation, the adjudicating authority shall direct the board to nominate a resolution professional who can drive forward the initiated insolvency resolution process. On receipt of the aforesaid direction, the board shall nominate a suitable resolution professional within a period of ten days. The board while nominating the resolution professional shall verify that no disciplinary proceedings are currently pending against the proposed resolution professional.
The adjudicating authority shall via order appoint the resolution professional as recommended or nominated above to drive forward the insolvency proceedings. The appointed resolution professional shall be provided a copy of the insolvency resolution process application as received by the adjudicating authority from the debtor or creditor.
Submission of Report by Resolution Professional
On receipt of the application as filed initiating for insolvency resolution process, the appointed resolution professional shall examine the application as submitted by the debtor or creditor within a span of ten days to be counted from the date of his appointment. Once the submitted application has been examined the resolution professional shall then prepare a report thereby recommending his decision as to whether the submitted application should be admitted or rejected.
The resolution professional may for arriving at decision ask the debtor to prove repayment of the debts that are being claimed to be unpaid by the creditors. The report as compiled by the resolution professional shall clearly highlight the reasons based on which the decision related to admission or rejection of the submitted application is undertaken. The resolution professional shall furnish a copy of his report to the concerned debtor or creditor as well.
Decision of Adjudicating Authority
Once the adjudicating authority receives the report as submitted by the resolution professional, it shall thereafter within a period of fourteen days pass an order either admitting the application or rejecting the same as, as it feels appropriate. In the scenario where application, as submitted for initiating insolvency resolution process, is admitted by the adjudicating authority, then the adjudicating authority may vide instructions conduct negotiations between the debtor and creditors to finalize a repayment plan.
The adjudicating authority shall furnish a copy of its order admitting or rejecting the application; report of resolution professional as submitted to the adjudicating authority and application as initially submitted for initiating insolvency resolution process to the creditor within a period of seven days from the date of passing the aforesaid order.
On the application for insolvency resolution process being admitted by the adjudicating authority, a moratorium period shall come into force and thereafter it shall terminate at the end of one hundred and eighty-day commencing from the date on which application for insolvency resolution process is admitted by the adjudicating authority or the date on which order is passed by adjudicating authority on a repayment plan. A similar situation as that of interim moratorium shall prevail during the moratorium period in relation to the debtor as well as his pending legal actions and debts.
Public Notice and Inviting Claim from Creditors
The adjudicating authority shall after admitting the application for initiating the insolvency resolution process issue a general public notice within a period of seven days from the date of passing order for the sake of inviting claims from all the creditors’ within a period of twenty-one days from the date of public notice.
The aforesaid notice shall be published in one English and one vernacular language newspaper. The notice shall also be affixed in the premises of adjudicating authority and shall also be displayed on the website of the adjudicating authority.
Registration of Claims of Creditors
The resolution professional is the sole authority where the claims are required to be registered by the creditors. Forgetting the claim registered the creditors may use the following medium of communication: electronic communication; courier; speed post or registered post.
Preparation of List of Creditors
After the invitation and registration of claims received from creditors, the resolution professional shall collate a list of creditors based on the information received from the application as filed by the debtor for initiating the fresh start process and claims received from creditors. The resolution professional shall make best efforts to draft the said list within thirty days from the date of the notice.
The debtor shall in collaboration with the resolution professional draft a layout of the repayment plan which shall contain a proposal to creditors to restructure their debts. The repayment plan shall also authorize or grant the resolution professional various powers like carrying on business off debtor on his behalf; realization of assets of debtor and administration or disposal of assets of the debtor.
Resolution Professional’s Report on Repayment Plan
The resolution professional shall after successful drafting of repayment plan submit the same along with the report to the adjudicating authority within a period of twenty-one days to be counted from the last date of submission of the claims.
The report as drafted by the resolution professional shall also highlight the date; time and place of the meeting if there appears a need to summon a meeting of creditors. While fixing the date of the meeting it should be noted that the date of the meeting should not be less than fourteen days and at the same time not more than twenty-eight days to be counted from the date of submission of a report. Also while booking a calendar for convening meetings, the convenience, and availability of creditors shall also be taken into consideration.
Calling Meeting of Committee of Creditors
The resolution professional shall after preparation of his report on repayment plan call a meeting of the committee of creditors by issuing a prior notice in this regard at least fourteen days in advance of the finalized date of the meeting.
The notice of the aforesaid meeting shall be provided to all the creditors mentioned in the list of creditors as chalked out by the resolution professional. The notice of the meeting shall incorporate within it the address of adjudicating authority to whom the repayment plan along with the report of resolution professional on repayment plan was served supported by required annexures.
Convening Meeting of Committee of Creditors
The meeting once called shall be conducted in accordance with the procedures and provisions as are highlighted in the Code. During the course of the convened meeting, the creditors may vide their decision approve, modify or reject the repayment plan as drafted by the resolution professional.
In the convened meetings creditors shall be eligible to vote in proportion to the voting share as assigned to them. The proportion of voting share shall be determined by the resolution professional. The secured creditors shall also be eligible to participate and vote in the convened meeting.
Seeking Approval of Creditors on Repayment Plan
The approval of creditors is a must requirement for carrying on any business on behalf of the debtor. In this regard approval of a majority of creditors representing three fourth in value of the creditors that were present in person or via proxy at the convened meeting of the committee of creditors is a mandatory requirement for seeking approval of repayment plan or any subsequent modification in the repayment plan therein.
Report of Convened Meeting of Creditors
Once the meeting of creditors has been duly convened for seeking approval of the creditor(s), it shall the duty of the resolution professional to compile a report of the duly convened meeting of the creditors. The report as compiled above shall include the minute-to-minute details of all decisions and discussions that were made during the convened meeting.
Decision of Adjudicating Authority on Repayment Plan
On receipt of the report of the duly convened meeting of creditors, the adjudicating authority shall thereafter vide its decision either approve or reject the repayment plan. The adjudicating authority shall form its decision on the basis of the report of the convened meeting of creditors as received by it from the resolution professional.
The decision of the adjudicating authority as passed shall also contain the directions for implementing the approved resolution plan. In the scenario where the repayment plan is approved by the adjudicating authority then the approved repayment plan shall be in effect as if it was proposed by the debtor and thereafter the plan shall be binding on the creditors as mentioned in the repayment plan and also on the debtor.
Implementation of Repayment Plan
The repayment plan once approved by the committee of creditors and adjudicating authority shall come into force and thereafter commence to be in implementation. On coming of the repayment plan into execution it shall be the sole responsibility of the resolution professional to monitor the implementation and execution of the approved repayment plan.
If any hindrances arise in the smooth execution of the repayment plan then the resolution professional is free to approach the adjudicating authority for seeking the required directions that will enable the smooth execution of the approved repayment plan. On being satisfied by the plea as raised by the resolution professional the adjudicating authority shall pass the necessary directions in this regard.
Completion of Repayment Plan
The resolution professional shall make his best endeavours to complete the execution of the repayment plan within the prescribed time limits in a time-bound manner. In this connection, the resolution professional shall after the successful completion of the repayment plan furnish the prescribed documents to the persons who are covered under the horizon of the repayment plan and to the adjudicating authority as well.
The resolution professional shall ensure that the documents are furnished within the duration of fourteen days from the completion of the repayment plan. If the resolution professional is unable to furnish the same within the due time then in such a scenario he may approach the adjudicating authority for seeking an extension in the time limit for furnishing the same. Once the adjudicating authority is satisfied then it shall grant an extension of not more than seven days to comply with the requirement.
On time-bound and successful implementation of the approved repayment plan, the resolution professional shall approach the concerned adjudicating authority for seeking a discharge order for debts as are mentioned in the repayment plan.
The resolution professional may approach the adjudicating authority for seeking discharge orders only if the approved repayment plan provides for early discharge or discharge on completion of the repayment plan. The discharge order as granted by the adjudicating authority shall also be furnished to the board for its record.
The insolvency resolution process is the initial step that can be taken against the defaulting individual & partnership firms. On successful completion of the insolvency resolution process or during the course of the insolvency resolution process an application can be made for a bankruptcy order.
During the course of the insolvency resolution process, all persons are it debtor or creditor shall cooperate with the appointed resolution professional so that he may efficiently execute the process of insolvency resolution and thereby seek discharge order.
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