A recovery method for creditors is the Corporate Insolvency Settlement Process (herein after CIRP). After making an application submission, CIRP is initiated. CIRP is the mechanism by which it is decided whether or not the person who has defaulted is capable of repayment. If an entity is not able to repay the loan, the business is restructured or forced to liquidate. If a corporation becomes insolvent, a CIRP can be undertaken by a financial creditor, an operational creditor, or the corporation itself.
1.An operational creditor, as defined in section 5(20) of the Insolvency and Bankruptcy Code, 2016 (herein after Code), is any person or company who is legally owed operational debt and includes those to whom such obligation has been lawfully assigned or transferred. Debts relating to the trade of commodities or services are included in operational debt, as defined in section 5(21) of the Code. It also covers debts owed to an employee or debts owed to the Central or State Governments or any other body in relation to the repayment of dues originating under any legislation.
2.A financial creditor has been defined as a person to whom a financial obligation is due, including a person to whom such obligation has been legally assigned or transferred, under section 5(7) of Code. In layman’s terms, a financial creditor is someone who lends money to a corporation as credit or loan with the expectation of receiving interest.
Corporate debtors – According to section 3(8) of the Insolvency and Bankruptcy Code, 2016, a corporate debtor is a person who owes a debt to anyone. To put it another way, he is the business organization itself. If a corporate debtor discovers that it is unable to repay its debts and is on the verge of insolvency, it can file a CIRP with the Adjudicating Authority.
The steps to be taken for a corporate settlement or liquidation are as follows:
-Application to The National Company Law Tribunal (herein after NCLT): NCLT may be called upon by a financial or operating creditor of the company or the company itself. The request is made to recognize that the corporation (corporate debtor as per IBC) is in the process of resolving corporate insolvency. For this, the borrower needs to demonstrate the default payment of a debt exceeding INR 1,00,000 and the NCLT must pass an order either admitting or refusing the request within 14 days. When making their applications before NCLT, there are distinct obligations that a financial and operational creditor must comply with. The default record must be submitted by a financial creditor, while an operational creditor must first make a claim for his unpaid debt. It is open to the corporate debtor to challenge the argument on the basis of an on-going dispute.
-Interim Resolution Professional & Moratorium: As soon as the CIRP is accepted by the corporate debtor the boards of directors are supposed to be suspended. The management is also put under an impartial ‘technical interim resolution’. In addition, the board ceases to have any power over the affairs of the company until the termination of the CIRP from this stage onwards. A moratorium becomes applicable at the same time, which forbids:
Continuation or commencement of any civil proceedings against the debtor of a company.
- Passing on its assets
- Regulation of any interest in defense
- Recovery of any land by an owner from it
- The moratorium continues until the corporate debtor is in CIRP if the supply of critical goods and services is halted or terminated.
- Analysis and verification of claims: At this stage, the specialist in the interim resolution may summon and check and also classify the claims made by the creditors. After that, a Committee of Creditors (COC) will be formed within 30 days of admission into CIRP, containing all of the corporate debtor’s financial creditors.
- Appointment of Professional Resolution: The COC will have to decide either to designate the interim resolution professional as a resolution professional within seven days of the creation of the committee, or they have the option to replace the interim resolution professional with another resolution professional.
- “Resolution Plan” approval: A resolution plan for the company’s recovery must be accepted by creditors within 180 days of the start of CIRP. This period can be extended by the NCLT by another 90 days. Such a proposal may be proposed by any person, management, creditors or a third party. It is the responsibility of the resolution specialist to ensure that the proposal follows the requirements set out in the 2016 Insolvency and Bankruptcy Code.
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