By MR Umarji
At the outset, it is necessary to note some salient features of the proposed Insolvency and Bankruptcy Code, 2015.
1. The trigger for filing an application for corporate insolvency resolution process is default in repayment of financial debt or operational debt. There is no requirement of any notice before filing for insolvency resolution process.
2. Verification of default is to be done on the basis of data available with information utility to be set up under the Code.
3. A ll solvent corporate debtors and lenders have to furnish data to information utilities in respect of debts, liabilities, assets against which secured loans are obtained and instances of default.
4. On verification of default from the information utility the adjudicating authority shall appoint interim insolvency professional and make a public announcement of commencement of the insolvency resolution process.
5. The insolvency professional has to take possession of all assets and manage the affairs of the corporate debtor.
6. The insolvency professional shall form a creditors committee to obtain the relevant data from the company and get the resolution plan prepared and approved by the creditors committee.
7. From the date of insolvency resolution order there will be a moratorium against any action or recovery proceedings against the corporate debtor for 180 days or extended time of 270 days.
8. The insolvency professional is a practicing chartered accountant, company secretary, advocate or cost accountant registered with the Insolvency and Bankruptcy Board of India.
9. There are time limits prescribed for each step in the insolvency resolution process and if the insolvency resolution plan is not approved within 180 days or 270 days, the corporate debtor shall be ordered to be wound up and put under liquidation.
It is clear from the above that if there is a default in repayment of debt, such default can trigger an insolvency resolution petition which if accepted will require the corporate debtor to hand over possession and management of the business enterprise to the insolvency professional and get a resolution plan approved.
If resolution plan is not approved, the corporate debtor will face the sale of its business enterprise as a going concern or closure by sale of assets, to pay the creditors.
The Proposed Bankruptcy Law is a major change and departure from the existing law, which is interpreted by the courts in favour of debtors.
Courts have held that winding up is a discretionary relief which the court should grant if it is satisfied that the existence of the company will cause immense prejudice to all concerned. The order of winding up should be made in the rarest of rare cases, and the discretion to wind up should not be exercised when there is slight hope of revival of the company.
On enactment of the Insolvency and Bankruptcy Code, 2015 the above principles and norms observed by the courts in the matter of passing orders for liquidation of companies will have to be replaced by following new principles.
1. The object of passing the insolvency resolution order and appointment of interim insolvency professional is to find causes for insolvency, examine viability of the business enterprise and approve the resolution plan if the creditors agree to such a plan.
2. If the resolution plan is not approved, efforts have to be made to sell or assign the business as a going concern and derive maximum value of the business enterprise.
3. If any business enterprise is carrying on business by borrowing money from banks, financial institutions and other creditors, it has to ensure that all commitments to repay borrowed funds are honored and if there is a default it is presumed that the business enterprise is insolvent and such insolvency can be resolved if the creditors agree to the resolution plan.
The proposed bankruptcy code is also an alarm to all the debtors to ensure that commitments to make payment whether for loan repayment or for purchase of goods, services and other inputs for the business on credit, are honored preferably before the due date, so that insolvency is not triggered.
(The writer is Former Chief Advisor, Legal, IBA. Views are personal)
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