NATIONAL COMPANY LAW TRIBUNAL – AN ADJUDICATING AUTHORITY UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

[Mr. M. GOVINDARAJAN]

Introduction

The Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) was enacted by the Parliament.  This code is an act to consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner-

• for maximization of value of assets of such persons;
• to promote entrepreneurship, availability of credit; and
• balance the interests of all the stakeholders including alteration

in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India (‘Board’ for short) and for matters connected therewith or incidental thereto.  This Act contains five parts-

• Part I – Preliminary;
• Part II – Insolvency Resolution and Liquidation for Corporate Persons;
• Part III – Insolvency Resolution and Bankruptcy for individuals and partnership firms;
• Part IV – Regulation of insolvency professionals, agencies and information utilities;
• Part V – Miscellaneous.

Adjudicating Authority

The insolvency resolution process is being done step by step.  The process is required to the order of the Adjudicating Authority almost in all steps.  The code prescribes ‘Adjudicating Authority’ for insolvency and liquidation and Corporate persons and insolvency resolution and bankruptcy for individuals and partnership firms.

Section 5(1) of the Code defines the expression ‘Adjudicating Authority’ for the purposes of Part II i.e., insolvency resolution and liquidation for corporate persons, as the National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.

Section 79(1) of the Code defines the expression ‘Adjudicating Authority’ for the purposes of Part III i.e., insolvency resolution and bankruptcy for individuals and partnership firms, as the Debt Recovery Tribunal constituted under section3 (1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.  The provisions of Part III have not yet come into force.

NCLT  as an adjudicating authority

The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. 

Where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a NCLT, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such NCLT.  The NCLT shall be vested with all powers of the Debts Recovery Tribunal as contemplated under Part III of the Code.

Transfer of cases

An insolvency resolution process or bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority, i.e., NCLT dealing with insolvency resolution process of liquidation proceeding of such corporate debtor.

Jurisdiction

The NCLT shall have jurisdiction to entertain or dispose of-

• any application or proceeding by or against the corporate debtor or corporate person;
• any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
• any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this code.

Limitation

Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium shall be excluded.

Exclusion of jurisdiction of civil court

No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT or NCLAT has jurisdiction under this Code.  Civil Court is not having jurisdiction over the insolvency proceedings.

No injunction shall be granted by any court, tribunal or authority in respect of any action taken, to be taken, in pursuance of any power conferred on the Tribunal under this Code.

Initiation of Corporate insolvency process

Section 6 of the Code provides that where any corporate debtor commits a default,-

• a financial creditor; or
• an operational creditor; or
• the corporate debtor itself

may initiate corporate insolvency resolution process in respect of such corporate debtor.

Initiation by financial creditor

• Section 7 provides that a financial creditor either by itself or jointly with other financial creditors may file an application in Form 1, for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating authority when a default has occurred.In case the application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf;
• The financial creditor shall, along with the application furnish-

• Record of the default recorded with the information utility or such other record or evidence of default as may be specified;
• The name of the resolution professional proposed to act as an interim resolution professional;
• Any other information as may be specified by the Board;

• The fee payable is ₹ 25,000/-;
• The Adjudicating Authority shall within fourteen days of the receipt of the application ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor;
• If the Adjudicating Authority is satisfied that-

• a default has occurred and the application is complete and there is no disciplinary proceedings is pending against the proposed resolution professional, it may, by order, admit such application; or
• default has not occurred or the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application;

• The Adjudicating Authority shall communicate the order to the financial creditor and the corporate debtor;
• The corporate insolvency resolution process shall commence from the date of admission of the application.

Initiation by operational creditor

• Section 8 and 9 deal with the procedure for initiation of insolvency resolution process by operational creditor.Section 8 requires that an operation creditor may, on occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in Form 3;
• The corporate debtor shall, within a period of ten days of the receipt of the demand notice bring to the notice of the operational creditor-

• existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
• the proof for the repayment of unpaid operational debt;

• After the expiry of ten days from the date of delivery of the notice or invoice demanding payment, if the operational debtor does not receive payment from the corporate debtor, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process in Form5;
• The fee payable by the operational creditor is ₹ 2,000/-
• The application shall be accompanied with the following documents-

• a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
• an affidavit to the effect that there is no notice given by the corporate debtor relating to a 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 by the corporate debtor; and
• such other information as may be specified;

• An operational creditor may propose a resolution professional to act as an interim resolution professional;
• The Adjudicating Authority shall, within fourteen days of the receipt of the application-

• admit the application and communication such decision to the operational creditor and the corporate debtor, if-

• the application made is complete;
• there is no repayment of the unpaid operational debt;
• the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;
• no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
• there is no disciplinary proceeding pending against any resolution professional agency;

• reject the application and communication such decision to the operational creditor and the corporate debtor, if-

• the application made is incomplete;
• there has been repayment of unpaid operational debt;
• the creditor has not delivered the invoice or notice for payment to the corporate debtor;
• notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
• any disciplinary proceedings is pending against any proposed resolution professional;

• The corporate insolvency resolution process shall commence from the date of admission of the application.

Initiation by corporate applicant

• Section 10 of the Code provides for initiation of corporate insolvency process by the corporate itself when there is a default committed by the corporate debtor.
• The application shall be in Form 6 and the fee payable is ₹ 25,000/-;
• The corporate applicant shall, along with the application, furnish the information relating to-

• its books of account and such other documents relating to such period as may be specified; and
• the resolution professional proposed to be appointed as interim resolution professional

• The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application by an order-

• admit the application, if it is complete; or
• reject the application, if it is incomplete.

• The corporate insolvency process shall commence from the date of admission from the date of receipt of application.

Supervision of Adjudicating Authority on insolvency resolution process

The Adjudicating Authority plays a vital role in insolvency resolution process, from the initiation of insolvency resolution process and till the discharge of the corporate debtor against whom insolvency resolution process is initiated.  The supervisory role of Adjudicating Authority is discussed as below-

Time limit for completion of insolvency resolution process

• The insolvency resolution process shall be completed within aperiod of one hundred and eight days from the date of admission of the application to initiate such process;
• If it could not be completed within the above time, the resolution professional shall file an application to Adjudication Authority to extend the period beyond one hundred and eighty days on the instruction of creditorsas approved by 75% of the creditors in the creditors’ meeting;
• The Adjudicating Authority, if it is satisfied that the said process cannot be completed within the stipulated time it may by order extend the duration of such process beyond one hundred and eight days by such further period as it thinks fit, but not exceeding ninety days;
• The extension period shall not be granted more than once by the Adjudicating Authority;

Declaration of moratorium

• The Adjudicating Authority after admission of the application, by an order-

• declare a moratorium ;
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims;
• appoint an interim resolution professional;

• The Adjudicating Authority shall by order declare moratorium for prohibiting all of the following-

• the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal arbitration panel or other authority;
• transferring, encumbering, alienating or disposing of by the corporate debtor and of its assets or any 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 the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
• the recovery of any property by an owner or less or where such property is occupied or in the 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 moratorium period;
• The order of moratorium shall have effect from the date of such order till the completion of the corporate resolution process.

Appointment and tenure of interim resolution professional

• The Adjudicating Authority shall appoint an interim resolution professional within fourteen days from the insolvency commencement date;
• If no proposal is made by the applicant, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency resolution professional who may act as interim resolution professional;
• The Board within ten days of the receipt of a reference, recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending;
• The term of the interim resolution professional shall not exceed thirty days from the date of his appointment;

Order directing to co-operate with interim resolution professional

• The personnel of corporate debtor shall extend all assistance and co-operation to the interim resolution professional as may be required by him in managing the affairs of the corporate debtor;
• If there is no such co-operation, the interim resolution professional may file an application to the Adjudicating Authority for necessary directions;
• The Adjudicating Authority shall by an order, direct such personnel to comply with the instructions of the resolution professional and to co-operate with him in collection of information and management of the corporate debtor;

Appointment of resolution professional

• The Committee of creditors, may resolve to appoint the interim resolution profession as a ‘resolution professional’ or to replace him any another resolution professional;
• For this purpose an application may be filed before the Adjudicating Authority;
• The Adjudicating Authority shall forward the name of the resolution proposed to the Board for its confirmation;
• On confirmation by the Board the Adjudicating Authority shall appoint the proposed resolution professional;

Replacement of resolution professional

• Where, at any time during the corporate insolvency profess, the committee of creditors is of the opinion that a resolution professional appointed, is required to be replaced, it may replace him with another resolution professional by a majority decision of the creditors;
• The Committee of creditors shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority;
• The Adjudicating Authority shall forward the name of the proposed resolution professional to the Board for its confirmation;
• On confirmation by the Board the Adjudicating Authority shall appoint the proposed resolution professional;

Approval of resolution plan

• A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of information memorandum;
• The  resolution professional shall present to the committee of the creditors for its approval of such resolution plans;
• The Committee of creditors may approve the said plan by majority;
• The resolution professional shall submit the resolution plan as approved the committee of creditors to the Adjudicating Authority;
• If the Adjudicating Authority is satisfied that the resolution plan meets the requirementsit shall be order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan;
• If the resolution plan is does not confirm to the requirements, the Adjudicating Authority may, by an order, reject the resolution plan;
• After the approval of resolution plan the moratorium order passed shall cease to have effect;

Liquidation process

• Where the Adjudicating Authority, before the expiry of the insolvency resolution process does not receive a resolution plan or rejects the resolution plan, it shall-

• pass an order requiring the corporate debtor to be liquidated in the prescribed manner;
• issue a public announcement stating that the corporate debtor is in liquidation; and
• require such order to be sent to the authority with which the corporate debtoris registered;

• Where the resolution plan approved by the Adjudicating Authority is contravened by the corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order.The Adjudicating authority shall pass a liquidation order on the said application;
• A suit or other legal proceeding may be instituted by the liquidator on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority;
• Where the Adjudicating Authority passes an order for liquidation, the resolution professional may act as liquidator unless otherwise replaced by the Adjudicating Authority;
• The Adjudicating Authority shall by order replace the resolution professional if the resolution professional failed to meet the requirementsor the Board recommends the replacement of a resolution professional to the Adjudicating Authority for reasons recorded to be in writing;
• The Adjudicating Authority then may direct the Board to propose the name of another insolvency professional and the Board is to submit within ten days the name of another resolution professional and the Adjudicating Authority shall by an order appoint such insolvency professional as liquidator;
• A credit may appeal to the Adjudicating Authority against the decision of the liquidator rejecting the claims within fourteen days of the receipt of such decision;
• The liquidator may apply to the Adjudicating Authority for avoidance of preferential transactions and the Adjudicating Authority may , by an order require any property transferred in connection with the giving of the preference to be vested in the corporate sector;
• Where an undervalued transaction has taken place and the same has not been reported to the Adjudicating Authority by the liquidator, then a creditor, member or a partner of a corporate debtor may make an application to the Adjudicating Authority to declare such transactions void and reverse their effect;
• Where the Adjudicating Authority is satisfied that the undervalued transactions had occurred it shall pass an order restoring the position as it existed before such transactions and reversing the effects and order the Board to take disciplinary proceedings against the liquidator;
• Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator may make an application to the Adjudicating Authority in this regard.The Adjudicating Authority, if it is satisfied that the terms of a credit transaction required exorbitant payments to be made by the corporate debtor, it shall restore the position as it existed prior to such transactions;
• A secured credit, if faces resistance from the corporate debtor or any person in taking possession of, selling or otherwise disposing off the security, he may make an application to the Adjudicating Authority to facilitate the secured creditor to realize such security interest in accordance with law for the time being in force;
• Where the assets of the corporate debtor have been completed liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.The Adjudicating Authority order that thecorporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly;
• Within seven days from the date of such order, the same shall be forwarded the authority with which the corporate debtor is registered.

Disposal of application

Section 64 provides that the application should be disposed within the time limit specified in the provisions of this Code by the Adjudicating Authority.  If it could not be passed within the specified period, the Tribunal shall record the reasons for not doing so within the period so specified.  The President of the Tribunal may after taking into account the reasons so recorded, extend the period specified in the Act but not exceeding ten days.

Penalty on malicious proceedings

Section 65 provides that if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than the resolution of insolvency, or liquidation, the adjudicating authority may impose upon such person a penalty which shall not be less than ₹ 1 lakh but may extend to ₹ 1 crore.

If any person initiates voluntary liquidation proceedings with intent to defraud any person, the adjudicating authority may impose upon such person a penalty which shall not be less than ₹ 1 lakh but may extend to ₹ 1 crore.

Fraudulent or wrongful trading

Section 66 provides that if during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.  \

On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

• before the insolvency commencement date, suchdirector or partner knew or oughtto have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
• such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.

The Adjudicating Authority may give such further directions as it may deem appropriate for giving effect to the order and in particular, the Adjudicating Authority may-

• provide for the liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the corporate debtor held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on this behalf; and
• from time to time, make such further directions as may be necessary for enforcing any charge imposed under this section.

Where the Adjudicating Authority has passed an order in relation to a person who is a creditor of the corporate debtor, it may, by an order, direct that the whole or any part of any debt owned by the corporate debtor to that person and any interest thereon shall rank in the order of priority of payment after all other debts owed by the corporate debtor.

Appeal against the order of Adjudicating Authority

Section 61 provides that any person aggrieved by the order of the Adjudicating Authority may prefer an appeal to the National Company Law Appellate Tribunal.  Such appeal shall be filed within thirty days.  The National Company Law Appellate Tribunal may allow an appeal filed after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing the appeal but such period shall not exceed fifteen days.

Section 61(3) provides that an appeal against an order approving a resolution plan under section 31 may be filed on the following grounds-

• the approved resolution plan is in contravention of the provision of any law for the time being in force;
• there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;
• the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;
• the insolvency resolution process costs have not been provided for repayment in priory to all other debts; or
• the resolution plan does not comply with any other criteria specified by the Board.

Section 61 (4) provides that an appeal against a liquidation order passed under section 33 may be filed on grounds of material irregularity or fraud committed in relation to such a liquidation order.