INSOLVENCY ACT- Is it the time to meet your fortune teller?


Since the introduction of insolvency and Bankruptcy Code (IBC) fortunes of many had changed overnight. Till then, holding on to the ownership of an entity was considered as a divine right- a Right which no one can question. Since the introduction of the IBC, many stalwarts


who owned conglomerates had to step down from their adobes of comfort and face the hard reality of losing control over their business. In recent days many big corporate names appeared in newspaper headlines for wrong reasons.


The principal behind the Insolvency and Bankruptcy Code (Code) is simple. If you owe more than Rs. 1 lakh to someone, either against availing of a service or against the purchase of a product or as a loan, whether secured or unsecured, and the said payment is defaulted, then you have no right to continue in the said position. The Corporate which had defaulted in making the payment is called Corporate Debtor(CD). Corporate Insolvency Resolution Process [CIRP] is the time bounded process through which the Corporate Debtor (CD) shall face the Insolvency process. CIRP is for a period of 180 days within which all efforts shall be put in to revive the Corporate Debtor from a great fall. The crux of IBC is not to punish the defaulter but to handhold it to normalcy through a process called resolution process. In order to help the Corporate Debtor during its hard time, a professional shall be appointed as Resolution Professional(RP) , who shall take over the management of the Corporate Debtor from the Board of Directors of the Company. The Board of Directors of the Corporate Debtor shall be suspended during the CIRP and RP shall be playing their role. It is very logical to keep away the promoters from the management of the company. There is a saying that there are no sick companies and there are only sick promoters.


As the insolvency is a time bounded process and requires specific skills to resolve the matter, the Resolution process shall be carried out through National Company Law Tribunal (NCLT). The National Company Law Tribunal (NCLT) shall be the adjudicating authority for the corporate debtor in insolvency resolution or liquidation or Bankruptcy of the corporate guarantors or personal guarantors of the corporate debtor. Any proceedings pending against any of the mentioned parties, in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution or liquidation proceedings of such corporate debtor.


During the CIRP, there will be a moratorium on all its existing debts of the Corporate Debtor. Resolution Professional shall constitute a committee of Creditors(CoC) which shall consists of only Financial Creditors. During the CIRP, the Resolution Professional shall invite the bids for reviving the Corporate Debtors which shall be known as “Resolution Plan”. The Resolution plan shall contain the clauses for the revival of the Corporate Debtor by repaying the debts. The resolution plan has to be approved by the CoC and the NCLT should be satisfied about the rationale of the plan. Once the resolution plan is approved, the bidder shall act on the basis of the terms of the plan and settle the debts of the Corporate Debtor in the manner specified in the Code, which is named as Water fall mechanism. On approval of the Resolution plan the moratorium shall come to an end. The promoters of the Corporate Debtor have to give way to the bidder who won the bid.


In case there are no resolution plans or the plans submitted are not acceptable to the CoC or the NCLT and on expiry of 180 days(which can be extended upto 270 days) the Corporate Debtor shall face liquidation. The Resolution Professional (RP) shall act as Liquidator and he shall relieve the Board of Directors from all the responsibilities and duties. The Liquidator shall sell of the assets of the Corporate Debtor and settle the debts of the Corporate Debtor based on the water fall mechanism specified in the Code.


The purpose of the Code is to protect the assets and business of the Corporate Debtor without value erosion and hand over the baton to a more effective team who shall takeover and settle the debts of the Corporate Debtor. The intention behind the Code is to preserve the capital of the business, retain the employment levels and protect the business environment of the Country.


The IBC is literally and practically a path paving piece of legislation which is capable to improve the financial health of the Corporate Debtor, stressed lenders and vendors and the Country as a whole. Insolvency Professionals play a very crucial role in the entire process and she/ he shall act a pivot around which the entire process shall revolve.


Author is a Resolution Professional and advisor to Corporate bodies on various Management and Corporate law related matters.



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