When an entity has gone insolvent, it falls up to the Insolvency and bankruptcy Board of India, and the respective tribunals to resolve the issue of insolvency. Through the insolvency resolution process, the goal is to:
- Relieving the debtors from the burden of debts
- Providing a clean slate to the insolvent entities
- Ensuring that the profits of resolution get redistributed among the operational/financial creditors
- To ensure that the distribution of profits among the creditors is done in an expedited and fair manner.
The bodies involved
Before we begin to look into the parties involved throughout the process:
- The operational/financial creditor: It is to who the insolvent entity owes the debt.
- The corporate debtor: It is the insolvent entity.
- Insolvency Resolution Professional: The one who is responsible for designing and conducting the insolvency resolution process.
- The NCLT: The NCLT refers to the adjudicating authority National Company Law Tribunal.
- The committee of Creditors: The committee of creditors is a committee whose members are the chosen from the creditors the corporate debtor is indebted to.
These are the bodies involved.
The process of insolvency Resolution
The process of insolvency resolution involves the following process:
- First, there is an occurrence of payment default from the side of the corporate debtor.
- If that happens, then the creditor can send the debtor a demand notice under section 8 of IBC 2016.
- The debtor has 10 days to respond to the demand notice. If there is no response, then either the creditor or the debtor can file a petition under section 9 to initiate the insolvency resolution process to the NCLT
- If the NCLT admits the application, it proceeds to appoint insolvency professional.
- A committee of Creditors is then formed by the creditors.
- This committee then confirms the appointment of Resolution professional.
- Then, the job begins where the Insolvency Professional dives into Information Utility and create an information memorandum.
- The creditor than creates a proper resolution plan using the memorandum.
- A vote is taken from the committee of creditors as to whether the corporate debtor has to reach a resolution, or it has to be liquidated.
If a resolution is reached, then the company is sold on the market and the resultant profits are divided among the creditors.
If there is no resolution or the committee of creditor’s votes for the corporate debtor to be liquidated, then the corporate debtor’s assets are sold in order to repay the creditors.
The entire process starting from step has to be completed within a span of 180 days. However, the debtor can ask for an extension of about 90 days for a single time. However, this request needs to be approved by the Committee of Creditors.