After much debate and anticipation, Insolvency and Bankruptcy Code, 2016 “IBC” or “Code” was notified on 28th May 2016. The Code is historical development for economic reforms in India. The Code reduces the resolution time, boosts investors’ confidence, simplify complex legal framework, address NPA situation and develops credit and bond market.
Where one claims are pending over a debtor in Indian market then this is the act.If you have provided services, supply goods, lend money and you are unable to recover it and amount is undisputed, then this is the act one should look forward. One would be only covered under this act where the minimum amount in defaultis one lakh rupees or one thousand five hundred seventy USD.
The Code lays down certain objectives in a way to addressing the burden of domestic and foreign creditors. The Code consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.
This Code gives priority to payment of financial debt owed by unsecured creditor over the Government dues.
The Code provides a moratorium period of 180 days to Corporate Debtor over all other pending legal proceeding. All such proceedings in respect of any debt shall be deemed to be stayed; the creditors shall not initiate any fresh legal action/proceeding and on the other hand the debtor shall not transfer, alienate, encumber or dispose of any of its assets or his legal rights or beneficial rights herein.
WHO CAN INTITIATE INSOLVENCY RESOLUTION PROCESS
Section 6 of the Code specifies that the insolvency and bankruptcy proceeding against Corporate Debtor could be triggered by three entities.
Financial Creditor either itself or jointly with other financial creditors: u/s -7
Operational Creditors: u/s -9
Corporate Debtor itself: u/s -10
Under this article we will discuss the aspects of insolvency proceeding initiated by Operational Creditor
OPERATIONAL CREDITOR
Operational Creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legal assigned or transferred.
“Operational debt” herein refers to a claim in respect of the provisions of the goods or services including employment or a debt in respect of the repayment of dues arising under any law.
PREREQUISITES FORAPPLICATION BYOPERATIONAL CREDITOR U/S-8
As per Section 8 for filing an application of insolvency resolution process by operational creditor – there must be a default in terms of payment, “default” means non payment of debt when whole or any part of installment of the amount of debt has become due and is not repaid by the debtor or corporate debtor.
An operational creditor may, on the occurrence of the default, deliver a demand notice to corporate debtor of unpaid operational debtor copy of an invoice.
The corporate debtor shall within the period of 10 days of the receipt of the demand notice or copy of the invoice , bring to the notice of the operational creditor-
Existence of a dispute, record of the pendency of the suit;
The repayment of unpaid operational debt- by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account, the operational creditor has encashed a cheque issued by the corporate debtor.
MANDATORY DOCUMENTS TO BE ATTACHED ALONG WITH THE APPLICATION
The operational creditor shall along with the application furnish-
copy of the invoice demanding payment from corporate debtor.
an affidavit to the effect that there is no notice given by the corporate debtor relating to the dispute of the unpaid operational debt.
A copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of unpaid operational debt.
CORPORATE INSOLVENCY RESOLUTION PROCESS BY OPERATIONAL CREDITOR U/S-9
The operational creditor must send a demand notice to the corporate debtor .After the expiry of ten days from the date of delivery of notice, if the operational creditor does not receive payment from the corporate debtor or notice of dispute, the operational creditor may file an application before the adjudicating authority.
An operational creditor initiating a corporate insolvency resolution process may propose a resolution professional.
The adjudicating authority shall within a period of 14 days either admit the application if the conditions are fulfilled above.
The adjudicating authority may even reject the application if the application is incomplete, repayment has been made, all other documents/conditions are not fulfilled.
ADJUDICATING AUTHORITY FOR APPICATION U/S-9
The Adjudicating Authority for the applications under section 9 of the Code is National Company Law Tribunal “NCLT”. The location of the registered office of the Corporate Debtor shall decide the jurisdiction of NCLT where the application is to be filed by Corporate Debtor. The Adjudicating Authority shall within a period of 14 days of the receipt of the application, by an order admit the application or reject the application, if it is incomplete.
EFFECT & IMPACT OF ADMISSION OF APPLICATION
The effect and impact of the admission of the application filed by Operational Creditor under section 9 by the Adjudicating Authority are as under:
The power of the Board and management immediately vests with the IRP
A moratorium is declared for prohibiting all the following namely-
the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority
Transferring encumbering alienating or disposing off by the corporate debtor any of its assets or nay legal right or beneficial interest therein
Any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under SARFAESI
The recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor
The supply of essential goods or services to the Corporate Debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period
RESOLUTION PLAN & ORDER OF DISTRIBUTION
As per section 5(26) “Resolution Pan” means a plan proposed by any person for insolvency resolution of Corporate Debtor as a going concern. It can be submitted by Financial creditors, Operational Creditor, Corporate Debtor, Committee of Creditors, any other asset who is interest in buying assets, taking over the Corporate Debtor as a going concern.
If no resolution is reached with the prescribed time, the Corporate Debtor shall be liquidated and liquidation amount shall be distributed according to section 53 in following order of preference:
Cost of insolvency Professional
Secured debt together with workmen dues
Employee dues for a period of 12 months
Other unsecured financial creditors
Central and state government dues and remaining part of secured debt, if any after sale of mortgage assets by financial creditors.
Any remaining debt and dues
Preferential Shareholder
Equity shareholder of partner (if any)
CONCLUDING REMARKS
If you have a claim of more than One lakh Rupees, in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the central government, any state government or local authority you are eligible to initiate insolvency proceeding against a company.
