PROPOSED CHANGES IN ADMISSION OF ‘CIRP’ APPLICATIONS

[Mr. M. GOVINDARAJAN]

Corporate Insolvency Resolution Process

Section 6 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides that  where any corporate debtor (‘CD’ for short) commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process (‘CIRP’ for short)in respect of such corporate debtor in the manner as provided under  Chapter II.

Section 7 provides for the initiation of CIRP by a financial creditor against a corporate debtor if the CD committed default.  An operational creditor may initiate CIRP against a corporate debtor if he committed a default under section 9 of the Code.  Section 10 provides that the corporate applicant itself may file an application before the Adjudicating Authority for initiation of CIRP if it committed default in paying the dues to the financial creditors or operational creditors.   Each section (7, 9 or 10) has its own procedure for initiation of CIRP.

The Financial Creditor is to file an application under section 7 of the Code in the prescribed form along with the prescribed fee along with the record of default recorded with the Information Utility or such other record or evidence of default.  The name of the Insolvency Professional proposed to act as Interim Resolution Professional (‘IRP’ for short) is to be informed in the application along with his consent letter.   Section 7(4) of the Code provides that the Adjudicating Authority within 14 days of the receipt of the application shall ascertain the default from the record available with the Information Utility or other records.  Section 7(5) of the Code provides that where the Adjudicating Authority is satisfied that a default has occurred and there is no disciplinary proceedings pending against the proposed resolution professional and the application is complete, it may, by order, admit the application or reject the application.

Section 8 of the Code provides that an operational creditor may, on the 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 CD in such form.   The CD shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice inform the payment details or raise a dispute to the operational creditor.  Section 9 provides that if the operational creditor does not receive any payment or raise the dispute, then the operational creditor may file an application before the Adjudicating Authority in proper form along with the proper fees.  The operational creditor may propose a name of insolvency professional to act as Interim Resolution Professional.  The Adjudicating Authority  shall, within 14 days of the receipt of the application by an order admit the application if it is in complete and no disciplinary case is pending against the proposed Interim Resolution Professional or reject the application.

Section 10 of the Code provides that where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority in the prescribed form along with the required documents and fees.  The Corporate debtor has to pass a special resolution approving the CIRP.  In the application the name of insolvency professional to act as Interim Resolution Professional may be furnished.  The Adjudicating Authority shall, within a period of 14 days of the receipt of the application, by an order admit the application, if it is complete; or and no disciplinary proceeding is pending against the proposed resolution professional or reject the application.

Proposed changes

Ascertainment of default through Information Utility only

In practice, substantial time is spent in determining if a default has occurred, mainly due to the time taken to produce evidence, contesting arguments of the necessary parties on the occurrence of a default, or existence of a dispute (in case of an application by an operational creditor.  The time spent in these activities can be reduced if only the relevant material is placed before the Adjudicating Authority, and it is only required to determine the occurrence of a default, or the existence of a genuine dispute related to it.

Section 215 (2) of the Code provides that it is mandatory for the Financial Creditors to submit financial information to the Information Utility.  It is not mandatory for an operational creditor to submit such financial information to the Information Utility.   

Therefore it is considered that before making an application to initiate the CIRP, the relevant information regarding the occurrence of a default or dispute may be ascertained at the Information Utility by the financial creditors, operational creditors and corporate applicant.  It is proposed to amend Section 215(2) to provide that where an Operational Creditor intends to apply to the Adjudicating Authority to initiate the CIRP against a CD, she shall also be required to file the relevant financial information with the Information Utility in advance.   This method will reduce the time in deciding the admission of the application for CIRP by the Adjudicating Authority.

To effectuate the proposal described above, it is essential to ensure the validity of the financial information submitted to the Information Utility and that the CD’s views supplement it. Therefore, the CD should be required to respond to the financial information submitted before the IUs and either authenticates it or declines to do so.   For this purpose it is proposed to amend section 215 to provide a reasonable opportunity to the CD or the debtor to respond to the financial information submitted concerning them. To prevent recalcitrant debtors from causing delays at this stage, the financial information will be considered authenticated if the CD or the debtor does not respond within a stipulated period.

The Code may be amended to provide that while considering an application filed under sections 7 and 9, the Adjudicating Authority will only rely on the record of the default available with the Information Utility to determine if a default has taken place.  Such a record will be conclusive proof about the occurrence of a default.   In such limited cases, the Adjudicating Authority, on genuine reasons to be shown, may consider other evidence.

It is further proposed to amend Section 7 of the Code to clarify that while considering an application for initiation of the CIRP by the financial creditors, the Adjudicating Authority is only required to be satisfied about the occurrence of a default and fulfillment of procedural requirements for this specific purpose (and nothing more). Where a default is established, it is mandatory for the Adjudicating Authority to admit the application and initiate the CIRP.

If the above procedure is adopted the 14 days timeline is not at all required for admission of application. It is, therefore, proposed that a suitable amendment may be made to clarify the applicability of the timeline to that provision as well.

Restrictions in appointment of IRP

Section 10 of the Code empowered the corporate applicant to propose the name of insolvency professional to act as IRP.  In the notice it is pointed out that as per section 16 (2), the proposed IP is appointed as an IRP after admission of the case. It is felt that since the IRP is required to hold the trust and confidence of the Committee of Creditors upon commencement of the CIRP, it often becomes incongruous for a person being considered by the CD to be appointed as an IRP. She is responsible for accumulating relevant information from the CD and scrutinizing its affairs to trace avoidable transactions or transactions amounting to wrongful or fraudulent trading. Thus, it may be appropriate to appoint an independent person as the IRP to prevent misuse of this provision.

It is, therefore, considered that section 10 may be amended to delete the right of the CD to propose an IRP. In such instances, the IRP should be appointed by the Adjudicating Authority on the recommendation of the Board.

Note

It is to point out the operational creditor does not require appointing insolvency professional as IRP.  It is at the option of operational creditor to propose the name of the IRP.  Section 16(3) of the Code provides that where the application for corporate insolvency resolution process is made by an operational creditor and-

• no proposal for an interim resolution professional is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional;
• a proposal for an interim resolution professional is made under sub-section (4) of section 9, the resolution professional as proposed, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.

As a common practice the IRP in case of operational creditor shall be appointed by the Adjudicating Authority on the recommendations of the Board.

Penalty

It is proposed to give powers to Adjudicating Authority to impose penalty where it believes that such a person has filed frivolous or vexatious applications.