Liquidation Process Under IBC

 

Liquidation Process Under IBC

If the resolution plan is not approved or the CIRP fails, the company enters liquidation. The liquidation process is managed by a liquidator, who is appointed by the NCLT.

A. Liquidation Timeline:

1. Timeframe: Liquidation must be completed within one year from the date of the NCLT order to liquidate the company, although this timeframe can be extended if required.

2. Appointment of Liquidator:

   • The IRP is replaced by a liquidator, who takes over the management of the company’s assets.

   • The liquidator's role is to sell assets, realize debts, and distribute the proceeds to the creditors.

B. Sale of Assets:

1. Asset Sale: The liquidator must sell the company’s assets in a transparent and fair manner to maximize the value recovered for creditors.

2. Order of Sale:

   • The liquidator can sell assets either by auction or by private sale.

   • If the assets are not sold or realized, the liquidator must arrange for the liquidation of the company’s business in accordance with the law.

C. Distribution of Proceeds:

The proceeds from the sale of assets are distributed to creditors in the following order of priority:

1. Secured Creditors: Secured creditors (e.g., banks with collateral-backed loans) are paid first from the sale of the secured assets.

2. Unsecured Creditors: Once secured creditors are paid, unsecured creditors (including operational creditors and financial creditors) are paid.

3. Government Dues: Any statutory dues (like taxes) owed to the government are paid next.

4. Shareholders: If there are any remaining proceeds after all creditors are paid, the shareholders of the company may receive the balance.

D. Role of Creditors in Liquidation:

1. Submitting Claims: Creditors must submit their claims to the liquidator to be considered in the distribution of proceeds.

2. Claim Verification: The liquidator verifies the claims before proceeding with the distribution.

3. Priority of Payment: Creditors are paid according to the liquidation waterfall, with secured creditors receiving their share first, followed by unsecured creditors.

4. Monitoring Liquidation: The creditors (or their representatives) can monitor the liquidation process and ensure that assets are sold properly and that proceeds are distributed according to priority.

Creditor Decision-Making Process in CIRP

 

A. Committee of Creditors (CoC)

Once the Corporate Insolvency Resolution Process (CIRP) is initiated, the Committee of Creditors (CoC) is formed. The CoC plays a central role in determining the direction of the insolvency process, especially regarding the resolution plan.

1. Composition of CoC:

   • The CoC is primarily composed of financial creditors (like banks, financial institutions, bondholders, etc.), but operational creditors also have a role in certain cases.

   • The CoC’s membership is determined based on the quantum of debt each creditor holds.

2. Decision-making by CoC:

   • Resolution Plan Approval: One of the most critical roles of the CoC is to approve or reject the resolution plan put forward by the debtor or an external bidder.

   • Majority Voting: The CoC must approve the resolution plan by a 75% majority (by value of the financial creditors' claims).

     • If the majority of the financial creditors approve the plan, the resolution plan is submitted to the National Company Law Tribunal (NCLT) for final approval.

3. Decision-Making Powers:

   • Supervisory Role: The CoC supervises the Interim Resolution Professional (IRP), ensuring that the process runs smoothly.

   • Debt Restructuring and Compromise: The CoC also has the authority to approve any restructuring, compromise, or settlement of the debtor’s obligations.

   • Liquidation Decision: If the resolution plan is not approved or the process fails, the CoC can decide to initiate liquidation.

4. Voting and Creditor Influence:

   • Voting Share: Financial creditors generally have a greater influence in the CoC as they often hold a larger portion of the debtor’s debt.

   • Operational Creditors: Although operational creditors are part of the CoC, their voting power is limited due to the dominance of financial creditors.

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B. Creditors' Rights in Decision-Making

1. Filing Claims:

   • Creditors, both financial and operational, have the right to file their claims within the stipulated period (14 days from the IRP's appointment).

   • The claims submitted must be verified by the IRP, and only verified claims are considered by the CoC in decision-making.

2. Participation in Meetings:

   • Creditors (or their representatives) can attend CoC meetings and voice their concerns.

   • Active Participation: Creditors can actively participate in discussions about the resolution plan and suggest modifications if necessary.

3. Challenging Decisions:

   • If creditors feel that decisions made during the CIRP are unfair or illegal, they can challenge the CoC’s decision by filing an application before the NCLT.

4. Right to be Paid:

   • Creditors have the right to be paid according to the priority of claims once a resolution plan is approved or, in the case of liquidation, according to the liquidation waterfall under the IBC.

Debtor and Creditors in CIRP: Detailed Interaction

 

Debtor and Creditors in CIRP: Detailed Interaction

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1. Initial Stages of CIRP: Admission and Appointment of IRP

1. Debtor's Role:

   • Filing of Defense: If the debtor believes that the application for CIRP is unwarranted (for instance, if no actual default has occurred or there is a pre-existing dispute), the debtor can present its case before the National Company Law Tribunal (NCLT) and argue against the initiation of the CIRP.

   • Compliance: After the admission of the application, the debtor must comply with the CIRP process and cooperate with the Interim Resolution Professional (IRP).

2. Creditor's Role:

   • Filing the Application: Creditors (either financial or operational) are the ones who initiate the CIRP by filing an application before the NCLT. They must prove that the debtor has defaulted on a debt of ₹1 lakh or more.

   • Submission of Claims: Creditors (both operational and financial) must submit their claims to the IRP within a specific time frame, typically 14 days from the appointment of the IRP.

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2. Appointment of Interim Resolution Professional (IRP) and Moratorium

1. Debtor's Role:

   • Loss of Management Control: Once the IRP is appointed, the debtor loses control over the management of its business. The IRP takes over the operational control and decision-making of the company, and the management of the company is replaced by the IRP.

   • Cooperation with IRP: The debtor is required to cooperate with the IRP, provide necessary documentation, and assist in the resolution process.

   • Management of Assets: The debtor can continue to operate the business under the IRP’s supervision but must avoid taking major decisions such as selling assets or making payments without the IRP's consent.

   • Facilitating Resolution Plan: If the debtor has a proposed resolution plan, it can present the plan to the Committee of Creditors (CoC), but the decision-making power lies with the CoC.

2. Creditor's Role:

   • Committee of Creditors (CoC): Once the CIRP is initiated, a Committee of Creditors (CoC) is formed, primarily consisting of financial creditors (such as banks, financial institutions, etc.).

     • Role of CoC: The CoC is responsible for overseeing the resolution process, approving the resolution plan, and making key decisions regarding the future of the company.

   • No Actions Against Debtor: During the moratorium period, creditors cannot take legal action against the debtor. They must wait for the resolution process to proceed or participate in formulating a resolution plan.

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3. Resolution Plan: Debtor and Creditor Interaction

1. Debtor's Role:

   • Proposal of Resolution Plan: The debtor, along with the IRP, may propose a resolution plan if it believes the business can be restructured, re-financed, or sold to a third-party investor.

     • The debtor may engage with investors or buyers to propose a sale of assets, restructuring of debts, or a settlement of liabilities.

   • Negotiation with Creditors: The debtor may also participate in negotiations with the CoC to adjust terms in the proposed resolution plan to make it more acceptable to the creditors.

2. Creditor's Role:

   • Approval of Resolution Plan: Once a resolution plan is proposed by the debtor (or a third party), the CoC reviews and votes on it. A 75% majority of the financial creditors is required to approve the plan.

   • Negotiation Power: Creditors can negotiate terms within the plan, such as:

     • Amount to be paid to each creditor.

     • Structure of payments (lump-sum, installments, etc.).

     • Changes to interest rates, penalties, or asset sales.

   • Voting Rights: If the CoC approves the plan by a 75% majority vote, the plan is submitted to the NCLT for final approval. Operational creditors may not have as much voting power as financial creditors, but they can still voice their concerns during the approval process.

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4. Post-Approval of Resolution Plan

1. Debtor's Role:

   • Implementation of Plan: Once the NCLT approves the resolution plan, the debtor must implement it. This may involve debt repayment, restructuring of the company’s operations, sale of assets, or other methods to repay creditors.

   • Return of Control: If the plan successfully resolves the insolvency and creditors are repaid in line with the plan, the debtor resumes control over its business and operations.

   • Adherence to Resolution Plan: The debtor must adhere to the terms of the approved resolution plan and execute it within the stipulated time frame.

2. Creditor's Role:

   • Payment: The creditors (especially financial creditors) receive payment in accordance with the terms of the approved resolution plan.

   • Monitoring: Creditors may continue to monitor the debtor's adherence to the resolution plan and ensure that the business is being properly managed during and after the implementation phase.

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5. Liquidation: Debtor and Creditors’ Role if Resolution Fails

1. Debtor's Role:

   • Liquidation Process: If no resolution plan is approved within the stipulated timeline (180 days, extendable by 90 days), or the resolution plan is rejected, the company enters liquidation.

     • Appointment of Liquidator: The NCLT appoints a liquidator who will take control of the company’s assets and begin selling them off.

   • Winding Up of Business: The debtor's business operations cease, and assets are sold for the benefit of creditors.

2. Creditor's Role:

   • Claims in Liquidation: Creditors must file their claims with the liquidator. The liquidation proceeds are distributed to creditors in a specific order:

     1. Secured creditors (who have collateral for the debt).

     2. Unsecured creditors (operational and financial creditors).

     3. Equity shareholders (if any value remains).

   • Claim Priority: Creditors with secured debts have priority over those with unsecured debts. Operational creditors generally receive a lower priority than financial creditors.

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6. Debtor and Creditors Interaction in Liquidation

1. Debtor's Role:

   • Cooperation with Liquidator: The debtor must cooperate with the liquidator to ensure the liquidation process proceeds smoothly, including providing all required documents and assistance in selling assets.

   • Obligation to Act in Good Faith: The debtor must act in good faith and ensure no fraudulent transfers or asset concealments take place during liquidation.

2. Creditors' Role:

   • Claim Verification: Creditors must submit their claims for verification by the liquidator, who will determine the amount each creditor is entitled to.

   • Asset Distribution: The creditors will receive payment from the sale of assets in order of priority, as stipulated under the IBC.

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Conclusion:

The CIRP process under the IBC requires active cooperation between the debtor and the creditors to reach a resolution that either involves the restructuring of debts, sale of assets, or, if no solution is found, liquidation. The debtor's role is primarily about cooperation, compliance, and presenting a resolution plan, while the creditors (especially financial creditors) have the critical role of deciding whether the resolution plan is acceptable, voting on it, and ensuring that the debtor adheres to the terms.

If the resolution fails, the process moves toward liquidation, where the debtor's assets are sold, and the creditors are paid according to their priority.

the Corporate Insolvency Resolution Process (CIRP) and how both the debtor and creditor roles are managed during insolvency under the Insolvency and Bankruptcy Code (IBC), 2016

 Let's break down the Corporate Insolvency Resolution Process (CIRP) and how both the debtor and creditor roles are managed during insolvency under the Insolvency and Bankruptcy Code (IBC), 2016.

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1. Corporate Insolvency Resolution Process (CIRP)

The CIRP is the process through which a distressed corporate entity seeks to resolve its insolvency situation either by restructuring its debts, entering into a settlement, or facing liquidation if no resolution is reached.

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Key Stages of CIRP:

1. Initiation of CIRP:

   • Who can initiate CIRP: A financial creditor, operational creditor, or the corporate debtor itself can initiate the CIRP process.

   • Application to NCLT: The creditor (either operational or financial) files an application before the National Company Law Tribunal (NCLT) for the initiation of CIRP.

   • Timeframe: The NCLT must admit or reject the application within 14 days from the date of the application.

   • Admission Criteria: The creditor must prove the existence of a default in debt payment. If the default is above ₹1 lakh (for corporate debtors), the application is likely to be admitted.

2. Appointment of Interim Resolution Professional (IRP):

   • IRP Appointment: Upon admission of the CIRP, the NCLT appoints an Interim Resolution Professional (IRP), who takes control of the debtor’s affairs.

   • Role of IRP: The IRP assumes control of the corporate debtor's assets, management, and operations, and ensures that the debtor's business is managed during the insolvency process.

   • Public Announcement: The IRP makes a public announcement inviting claims from creditors and appoints the Committee of Creditors (CoC).

3. Constitution of Committee of Creditors (CoC):

   • CoC Formation: A Committee of Creditors (CoC) is formed by the IRP, consisting of financial creditors (such as banks, financial institutions, bondholders, etc.).

   • CoC's Role: The CoC plays a crucial role in determining the direction of the CIRP, including approving or rejecting resolution plans. It is essentially responsible for managing the resolution process.

   • Decision-making Power: The CoC makes decisions related to the resolution plan, liquidation, and other important steps during the insolvency process. The majority vote of 75% is required for any decision.

4. Moratorium:

   • Moratorium Period: A moratorium is declared once the CIRP is initiated, during which no legal actions (such as suits or recovery proceedings) can be taken against the corporate debtor.

   • Protection for Debtor: The moratorium ensures that the debtor’s assets remain intact during the resolution process and that no asset is liquidated or sold off without proper procedures.

5. Resolution Plan:

   • Submission of Resolution Plans: During the CIRP, potential resolution applicants can submit their resolution plans. A resolution plan typically includes proposals for the settlement of debts, restructuring of operations, or the sale of assets.

   • Role of CoC: The CoC reviews the proposed resolution plan. If the CoC approves the plan by a majority vote (75%), the plan is submitted to the NCLT for final approval.

   • Approval by NCLT: The NCLT approves the resolution plan if it meets the statutory requirements under the IBC. Once approved, the plan becomes binding on all stakeholders, including creditors.

6. Outcome of CIRP:

   • Successful Resolution: If the resolution plan is successfully approved, the corporate debtor is restructured, and the creditors’ claims are settled in line with the plan.

   • Failure of Resolution: If the CIRP fails to result in an approved resolution plan, the company is subjected to liquidation.

   • Timeframe: The CIRP is meant to be completed within 180 days, extendable by 90 days, which ensures timely resolution.

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2. Role of Debtor in CIRP:

1. Debtor’s Control:

   • Before CIRP: The corporate debtor retains management control before the insolvency application is admitted. The directors and management of the company are still in charge.

   • During CIRP: Once the CIRP process is initiated, the debtor’s management is replaced by the Interim Resolution Professional (IRP), who takes control of the debtor’s affairs.

   • Debtor’s Role in Resolution Plan: The debtor can play an active role in proposing a resolution plan to the CoC. However, the decision-making power lies with the CoC.

2. Cooperation with IRP:

   • The debtor is expected to cooperate with the IRP and the CoC, providing necessary information and assisting in the resolution process.

   • The debtor can participate in negotiations and contribute to formulating the resolution plan.

3. Opportunity for Restructuring:

   • The debtor can present a restructuring plan or negotiate a settlement, provided it meets the conditions laid out by the CoC.

4. Defending Against Insolvency:

   • If the debtor believes that the application for CIRP is not valid (for example, due to no default or a pre-existing dispute), it can file a defense against the application in the NCLT.

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3. Role of Creditors in CIRP:

1. Financial Creditors:

   • Financial creditors (such as banks and financial institutions) play a significant role in the CIRP. They are the main decision-makers during the process through their participation in the Committee of Creditors (CoC).

   • They vote on resolution plans, approve or reject proposals, and control the outcome of the process.

   • Financial creditors typically have more voting power, especially in the case of secured creditors.

2. Operational Creditors:

   • Operational creditors (suppliers, service providers) are also eligible to participate in the process, but their role is generally more limited compared to financial creditors.

   • They can submit claims and participate in the CoC. However, their influence in decision-making is relatively weaker because they typically hold a smaller portion of the overall debt.

3. CoC's Decision-making:

   • Majority Voting: The CoC decides major steps during the insolvency resolution process, such as the acceptance of resolution plans. A majority vote (75% of financial creditors) is required to approve or reject decisions.

   • Priority of Payments: The CoC will also prioritize creditors based on the order of payment under the IBC, with secured creditors taking precedence over unsecured creditors.

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4. Liquidation (If Resolution Fails):

If no resolution plan is approved within the stipulated period of 180 days (extendable by 90 days), or if the resolution plan is rejected by the NCLT, the corporate debtor enters liquidation under the IBC.

1. Appointment of Liquidator: The NCLT appoints a liquidator, who takes control of the debtor’s assets and oversees their sale.

2. Asset Distribution: The assets of the debtor are sold, and the proceeds are distributed among creditors according to their priority (secured creditors are paid first, followed by unsecured creditors).

3. Final Dissolution: After the liquidation process, the company is dissolved.

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Conclusion:

In the Corporate Insolvency Resolution Process (CIRP) under the IBC, 2016, the debtor plays a critical role in cooperating with the Interim Resolution Professional (IRP), negotiating a resolution plan, and potentially resolving the insolvency. Creditors, especially financial creditors, have significant powers in decision-making during the CIRP, primarily through the Committee of Creditors (CoC). If the resolution process fails, the company enters liquidation, where a liquidator is appointed to sell the debtor’s assets and distribute the proceeds to creditors.

object of IBC 2016

 The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with the primary objective of establishing a unified framework for the insolvency and bankruptcy resolution process in India. The key objectives of the IBC are to facilitate the resolution of distressed businesses, ensure the timely recovery of debts, and provide a structured process for both individuals and entities facing financial distress.

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Key Objectives of the IBC, 2016:

1. To Promote Early Resolution of Insolvency:

• One of the fundamental aims of the IBC is to promote early resolution of insolvency and default situations, enabling debtors to restructure their businesses, thereby saving valuable assets and businesses.

• The law is designed to expedite the process of insolvency resolution, reducing delays in the resolution process. The Corporate Insolvency Resolution Process (CIRP) typically takes 180 days, extendable by another 90 days, to resolve the financial distress.

2. To Maximize the Value of Assets:

• A key object of the IBC is to ensure the maximization of the value of assets during insolvency resolution and liquidation.

• By providing a structured framework for asset liquidation or restructuring, the IBC aims to prevent the erosion of the value of the debtor’s assets due to delayed or inefficient processes.

3. To Promote Credit Discipline:

• The IBC encourages credit discipline by ensuring that creditors can promptly take action if a debtor defaults on payment. It makes sure that lenders (banks, financial institutions, etc.) can recover their dues in a timely manner, creating an environment where credit risk is better managed.

• This enhances investor confidence and promotes healthier financial markets, making credit more accessible.

4. To Ensure Timely and Effective Resolution:

• The IBC aims to resolve insolvency issues within a specific timeframe to prevent the business from further deterioration. The time-bound nature of the process (CIRP) ensures that the debtor's business or assets do not lose their value due to prolonged insolvency proceedings.

5. To Provide a Clear and Efficient Framework for Corporate Liquidation:

• In cases where resolution is not possible, the IBC provides an efficient framework for the liquidation of companies and assets. The aim is to ensure that there is a systematic and fair process for liquidating the assets of the debtor and distributing the proceeds to creditors.

6. To Establish a Creditor-Driven Process:

• The IBC emphasizes the role of creditors in the insolvency process, especially the Committee of Creditors (CoC), which plays a pivotal role in approving or rejecting the resolution plan.

• The process is designed to be creditor-centric, giving creditors the power to make critical decisions related to the debtor’s resolution or liquidation.

7. To Provide a Framework for Personal Insolvency and Bankruptcy:

• The IBC also extends its coverage to individuals and partnership firms, enabling personal insolvency and bankruptcy proceedings (under Part III of the Code), which were not previously available under Indian law.

• This helps individuals and small business owners resolve their financial distress and clear their debts.

8. To Balance the Interests of Creditors and Debtors:

• The IBC seeks to balance the interests of both creditors and debtors. While creditors are given a clear pathway to recover their dues, debtors are also given an opportunity to come up with a resolution plan to restructure their debts and avoid liquidation.

9. To Enable the Creation of a National Insolvency Market:

• The IBC aims to create a national insolvency market where both creditors and debtors have access to a transparent and uniform insolvency resolution process. It promotes a structured framework for insolvency resolutions across different sectors of the economy.

10. To Improve Ease of Doing Business:

• The IBC is designed to improve India’s position in the Ease of Doing Business rankings by offering a clear legal structure for resolving insolvency issues.

• A faster and more efficient insolvency process reduces uncertainty for businesses and encourages investment, thus boosting the economic environment.

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Principles Underlying the Objectives of IBC:

1. Time-bound Process:

   • One of the most crucial aspects of the IBC is its time-bound approach. The Code mandates the completion of the CIRP within 180 days, extendable by another 90 days, with an aim to provide quick resolution to distressed businesses.

2. Creditor Priority:

   • The IBC prioritizes the interests of creditors, ensuring that they have a prominent role in decisions made during the resolution process and in the Committee of Creditors (CoC).

3. Asset Maximization:

   • The IBC aims to maximize the value of assets of the debtor. If the debtor’s business is not viable, the Code ensures a fair liquidation process, enabling creditors to recover at least a portion of their debts from the liquidation of assets.

4. Debtor’s Opportunity to Resolve:

   • The debtor is given an opportunity to restructure its debt and continue operations, if possible, instead of being immediately liquidated. This allows businesses to survive and avoid the social and economic consequences of insolvency.

5. Prevention of Asset Erosion:

   • A critical objective of the IBC is to prevent asset erosion and keep businesses viable. The insolvency process stops the debtor from selling off assets without proper oversight and ensures that decisions are made in a structured and legal manner.

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Impact of IBC on India’s Economy:

• Credit Market: It has encouraged lenders to lend more responsibly, knowing that a default will lead to a swift and transparent recovery process.

• Resolution of Distressed Companies: The timely resolution of distressed companies helps to preserve jobs and assets, which benefits the economy as a whole.

• Corporate Governance: The IBC has strengthened corporate governance, as companies and their management are aware of the consequences of non-payment of debts.

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Conclusion:

The Insolvency and Bankruptcy Code, 2016 serves as a critical legislative tool in addressing insolvency and bankruptcy issues in India. Its primary objectives are to ensure timely resolution of financial distress, promote credit discipline, maximize asset value, and balance the interests of both creditors and debtors. By creating a streamlined and structured process, the IBC aims to improve the overall business environment and contribute to economic growth in India.

Who is a Debtor under IBC 2016

 Under the Insolvency and Bankruptcy Code, 2016 (IBC), a debtor is defined as a person or entity that owes a debt. More specifically, in the context of the IBC, the term "debtor" is typically used to refer to a corporate debtor, but it can also apply to individuals and partnerships under certain provisions of the Code. The debtor is the party who is in default and to whom an insolvency resolution process (CIRP) is applied if they fail to meet their obligations.

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Who is a Debtor under IBC 2016?

1. Corporate Debtor:

   • Under the IBC, a corporate debtor refers to a company or limited liability partnership (LLP) that owes a financial or operational debt to creditors.

   • A corporate debtor can be a private company, public company, partnership firm, or any other corporate body recognized by law.

   • The corporate debtor is the entity undergoing the insolvency resolution process (CIRP) if they have defaulted on debt payments.

   • The corporate debtor can initiate the CIRP themselves (voluntary) or can be forced into it by a creditor (involuntary).

2. Individual and Partnership Debtors:

   • Individuals or partnerships who owe debts to creditors are also covered under the IBC but through a separate part of the law known as the Insolvency and Bankruptcy Code (Personal Insolvency and Bankruptcy), which came into effect through the Insolvency and Bankruptcy Code (Amendment) Act, 2019.

   • Under the IBC, individual and partnership debtors can be subject to insolvency proceedings under Part III (commencing Section 79).

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Legal Definition of Debtor Under IBC:

• Section 3(7) of the IBC defines a "debtor" in the context of a corporate debtor as the person or corporate entity that owes a debt to another person.

• The debtor is the one who defaults on the debt and, as a result, may be subjected to a corporate insolvency resolution process (CIRP) or liquidation.

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Debtor's Role in CIRP:

1. Filing for Insolvency (Voluntary):

   • A corporate debtor can voluntarily initiate the CIRP by filing a petition before the National Company Law Tribunal (NCLT) if they are unable to repay their debts.

   • The debtor, in such a case, must also submit a list of creditors, their debt amounts, and details of the default.

2. Defending the Application (Involuntary):

   • If an operational creditor or financial creditor files an insolvency petition against the corporate debtor due to a default in payment, the debtor can defend the application by presenting evidence of a pre-existing dispute or payment of the debt.

   • If the default is not disputed, the corporate debtor is typically subjected to CIRP.

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Key Rights of the Debtor Under IBC:

1. Representation in the Committee of Creditors (CoC):

   • During the CIRP, the corporate debtor is represented by an interim resolution professional (IRP), who manages the day-to-day affairs of the debtor company and its financial decisions.

   • The debtor can propose a resolution plan (subject to approval by the Committee of Creditors (CoC)) to resolve the insolvency.

2. Avoidance of Liquidation:

   • The debtor can negotiate with creditors during the CIRP to avoid liquidation and reach a resolution plan to settle debts.

3. Corporate Restructuring:

   • The debtor can propose restructuring options such as the sale of assets, debt rescheduling, or compromise agreements to address the defaulting debts and return to solvency.

4. Time for Resolution:

   • The debtor is given a time frame of 180 days (extendable by 90 days) to finalize a resolution plan. If the debtor fails to propose a viable plan or if the creditors reject it, the debtor’s assets can be liquidated.

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Debtor's Liabilities During CIRP:

• During the CIRP process, the debtor's assets are preserved and managed under the supervision of an interim resolution professional (IRP). The debtor is required to cooperate fully with the IRP and creditors.

• The debtor's directors or management may lose control over the company during this process, as the IRP takes charge.

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Debtor in the Case of Individuals and Partnerships:

For individuals and partnerships, the concept of debtor insolvency operates under separate rules in the IBC. These include:

• Individual Debtors: Persons who owe financial or operational debt to creditors.

• Partnership Debtors: Partnership firms or individuals in a partnership who have incurred default and owe debt to creditors.

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Judicial Precedents Involving Debtors under IBC:

1. M/s. Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):

   • The Supreme Court emphasized that if the corporate debtor defaults on a debt, a financial creditor can initiate the CIRP under Section 7 of the IBC.

   • The debtor can only defend against the insolvency application if there is a pre-existing dispute or proof of payment.

2. Swiss Ribbons Pvt. Ltd. v. Union of India (2019):

   • The Supreme Court upheld the constitutional validity of the IBC, asserting that it aims to resolve corporate defaults by providing a structured process for both creditors and debtors.

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Conclusion:

Under the Insolvency and Bankruptcy Code, 2016, the debtor refers to any person or entity that owes a debt to a creditor, typically in the context of a corporate debtor who has defaulted on their financial or operational obligations. The debtor can voluntarily initiate the insolvency resolution process or face involuntary proceedings initiated by creditors. The debtor has certain rights to propose a resolution plan but also has the obligation to cooperate with the insolvency process, which could ultimately lead to liquidation if the issues are not resolved.

Financial Debt under IBC 2016

 

Financial Debt under IBC 2016

Under the Insolvency and Bankruptcy Code, 2016 (IBC), financial debt is defined under Section 5(8), and it refers to any debt owed to a creditor that arises from a financial transaction or credit facility. It includes a broad category of debts typically related to borrowings or credit arrangements.

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Key Definition:

Section 5(8) of IBC defines financial debt as follows:

"Financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes money borrowed, financial lease, and any liability in respect of the bond, debenture, loan, or any other instrument for borrowing money."

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Types of Financial Debt:

1. Loans:

• Secured loans: Loans backed by assets or collateral (e.g., mortgages, hypothecation).

• Unsecured loans: Loans without any security interest.

• Overdrafts or credit facilities: Provided by banks or financial institutions.

2. Bonds and Debentures:

• Debt securities issued by corporations or governments that are payable with interest.

3. Debt Securities:

• Instruments like commercial papers, treasury bills, or certificates of deposit.

4. Financial Leases:

• An arrangement in which a company leases an asset but is essentially treated as owning it (e.g., operating leases or finance leases).

5. Securitization:

• When a financial institution sells its financial assets (like loans or mortgages) to raise funds.

6. Guarantees:

• Personal or corporate guarantees provided for debts or loans taken by others.

7. Other Borrowings:

• Any other instrument for borrowing money that falls under the definition of "debt" in the IBC.

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Key Features of Financial Debt:

Aspect	Explanation
Disbursed Debt	The debt must be disbursed in the form of money or goods, which represents the time value of money.
Time Value of Money	The repayment of the debt must be based on the principle of time value of money, which means repayment is expected to be done with interest, or at a specified time.
Interest	The debt may carry interest, which is considered part of the financial debt.
Security	Secured debts (loans backed by collateral) or unsecured debts are both considered financial debts.
Instruments	Includes instruments such as debentures, bonds, or loan agreements.

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Who Can File for Insolvency under Financial Debt?

• Financial creditors — entities who have provided loans or credit facilities — can file for Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC.

Examples of Financial Creditors:

• Banks and financial institutions,

• Bondholders,

• Debenture holders,

• Hedge funds or private equity funds,

• Other lenders or any institution that has provided financial support or facilities.

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Application for CIRP by Financial Creditors:

1. Filing Application:

   • A financial creditor can file an application with the National Company Law Tribunal (NCLT) for the initiation of the CIRP against a corporate debtor.

2. Default:

   • The default in payment must be on the debt disbursed by the financial creditor. The default must be above the threshold limit prescribed under IBC (typically ₹1 lakh).

3. Required Documents:

   • Loan agreement or debt instrument.

   • Evidence of default (e.g., demand notices, bank statements).

   • Details of the debt and interest.

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Priority of Financial Creditors in CIRP:

1. Committee of Creditors (CoC):

   • In the CIRP process, financial creditors have significant voting power in the Committee of Creditors (CoC), as they typically hold the largest portion of the debt.

2. Priority in Distribution:

   • Financial creditors generally have a higher priority than operational creditors when it comes to distribution of proceeds from the liquidation of assets.

   • However, the distribution to financial creditors is subject to the order of priority laid out in the IBC, with secured creditors taking precedence over unsecured creditors.

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Key Judicial Precedents on Financial Debt:

1. Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):
   The Supreme Court clarified that for the CIRP process, it’s sufficient for a financial creditor to establish that there is a default and that the claim is based on a financial transaction.

2. Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC Ltd. (2019):
   The Supreme Court ruled that an operational creditor does not have the same rights as financial creditors when it comes to filing for insolvency, and only financial creditors can trigger CIRP.

3. M/S. Tata Capital Financial Services Ltd. v. M/s. Bhandari Hosiery Exports Ltd. (2019):
   The NCLAT affirmed that a financial debt is based on financial arrangements, and interest forms part of the debt.

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Conclusion:

Financial debt is a broad category that primarily includes debt related to loans, bonds, debentures, and other instruments of borrowing money. The IBC allows financial creditors to initiate insolvency proceedings against defaulting corporate debtors, giving them a prominent role in the Corporate Insolvency Resolution Process (CIRP).