The Insolvency and Bankruptcy Code (IBC) was sanctioned in 2016 to address the shortcomings in the pre-existing staggered insolvency laws in the country and to integrate them under a single umbrella. The reason – India ranked 135 out of 190 countries in the World Bank Ease of Doing Business Index 2015 in the area of resolving insolvency.
Furthermore, based upon a study conducted by World Bank in 2016, insolvency resolution in India took about 4.3 years in average as compared to 1 year in the UK, 1.5 years in the USA, and 2 years in South Africa. Hence, enacting a unified insolvency code was the need of the hour as India’s bankruptcy policy was considered to be ineffective and outdated as compared to debt recovery globally.
According to Chapter II, Part II of the IBC, wherein a corporate debtor perpetrates a default, an operational creditor or a financial creditor has the authority to initiate the corporate insolvency resolution process in a specified manner. Moreover, this process must be concluded within 180 days from the date of admission of the application.
Before moving on, it is crucial to understand ‘What Is The Insolvency Resolution Process?’. Insolvency resolution process refers to a scenario wherein a company defaults on making payments to their creditors.
Chapter IV of Part II of the IBC prescribes the method in which a fast track corporate insolvency resolution process should be carried out. It also includes that this process must be completed within 90 days from the insolvency commencement date.
In 2017, the Insolvency and Bankruptcy Board of India issued draft provisions regarding the Fast Track Insolvency Resolution Process for Corporate Persons and the draft notifications for eligible corporate debtors under Section 55(2) of the IBC.
Following this, the RBI issued a circular that advised banks to have adequate provisions for advances and loans at all times as it would help in enhancing the stability of the financial sector.
Fast Track Corporate Insolvency Resolution Process is a speedy approach to accomplish corporate insolvency in just 90 days, as compared to the standard 180 days duration for the same procedure.
Under the IBC Code, such fast tracked solution processes are only available for specific cases. Besides, this fast track insolvency resolution process can also be extended beyond the 90 days duration. However, the period cannot exceed 45 days, in case it has been approved by the NCLT based on the resolution professional’s application.
According to the provisions of the IBC notification, fast track corporate insolvency resolution process is applicable only for the following:
Small company, as specified under section 2 (85) of the Companies Act, 2013
Start?ups, except Partnership Firms, as specified in the Ministry of Commerce and Industry’s notification (1); and
Unlisted company that has total assets, as stated in the preceeding financial year’s statement, which should not exceed Rs.1,00,00,000 (One Crore Rupees)
The company’s creditor or a corporate borrower (debtor) needs to file an application to the NCLT, attaching all proofs of existence of default to initiate the fast track resolution process. Once the application has been admitted and an interim resolution professional (IRP) has been selected, the corporate debtor’s records get assessed.
In case the IRP is of the opinion that the fast track resolution process does not apply to the corporate debtor, then he is to file an application to NCLT for passing an order that converts the fast track process into a standard corporate insolvency resolution process. This applications needs to be files before the expiry of the stipulated 21 days from the date of the IRP’s appointment.
According to Section 55(2) of the IBC, an application for fast track corporate insolvency resolution procedure can be made in case of the following debtors:
A corporate debtor with income and assets below a level as indicated by the Central Government.
A corporate debtor with such amount of debt as indicated by the Central Government.
The draft notification also consists of the class of corporate persons to whom the provisions fast track corporate insolvency resolution procedure applies, which include:
Start-ups: A business is considered to be a start-up if the following conditions are met:
It remains as a start-up five years from its date of incorporation.
Its turnover for any financial year has not exceeded ?25 crores.
It is focused on development, innovation, or commercialisation of new products and services aided by technology.
Small Company: According to Section 2(85) of the Companies Act 2013, a small company is referred to as one, if the following criteria are met:
Paid-up share capital does not surpass ?50 lakh.
The turnover mentioned in the last profit and loss statement should not exceed ?2 crores.
However, the requirements mentioned above do not apply to the following companies:
A subsidiary or a holding company.
A company registered under Section 8 of the Companies Act of 2013.
A corporate body or company governed by a special Act.
Other Company: Limited Liability Partnership (LLP) or company that has not borrowed any money exceeding ?2 crores.
The draft Insolvency Regulations of 2017 made the following amendments to the Insolvency Regulations of 2016:
Substitution of Words: ‘Fast track corporate insolvency resolution process’ should replace the phrase ‘corporate insolvency resolution process’.
Extortionate Credit Transactions: These are those credit transactions that involve the receipt of operational or financial debt to the corporate debtor. They are termed as such since it requires the corporate debtor to make exorbitant payments in lieu of the credit provided.
As per the Section 50(1) of the IBC, if the corporate debtor has been involved in such a transaction within 2 years before the insolvency commencement date, the liquidator can appeal to the Adjudicating Authority to the take the following actions against the extortionate credit transactions:
Restore the position that existed before the transaction.
Alter the terms of the transaction.
Set aside part of the entire debt created on account of the transaction.
Instruct any person who is a party to the transaction to repay the amount.
Relinquish any security to the liquidator that was provided as part of the extortionate credit transaction.
In a nutshell, the draft Insolvency Regulations of 2017 intended to expedite a faster insolvency resolution procedure for start-ups, small companies, and LLP or companies with borrowings less than ?2 crores.
We, at TRC Corporate Consulting, have a panel of in-house IBBI registered insolvency professionals for handling any statutory insolvency requirement that your business may require.
Our insolvency consultations include corporate financial restructuring, debt advisory, insolvency resolution planning, profitability study, insolvency services, asset tracing, and guidance on the Insolvency and Bankruptcy Code.
If you have any queries relating to IBC or insolvency, contact us right away!