Introduction

Operational creditors under Insolvency and Bankruptcy Code, 2016 (IBC) are the ones who supply goods or services to the corporate debtor in exchange for operational debt. As per Section 5(20) of IBC, an “operational creditor” means a person to whom an operational debt is owed. Section 5(21) of IBC defines “operational debt” as

“a claim for the provision of goods or services, including employment, or a debt for the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or a local authority.”

Whenever, a default occurs by the corporate debtor, the Corporate Insolvency Resolution Process (CIRP) can be initiated either by a financial creditor, an operational creditor or corporate debtor itself.

Financial creditors may initiate the CIRP by filing an application u/s. 7 of IBC, 2016 before the Adjudication Authority i.e National Company Law Tribunal (NCLT) against the corporate debtor upon occurrence of a minimum default of Rs. 1 crore. However, an Operational Creditors must first issue a ‘Demand Notice/Invoice of Payments’ under section 8 of IBC, 2016 to the corporate debtor and has to wait for a period of 10 days to file an application before the NCLT to initiate insolvency proceedings.

Position of operational creditors after the initiation of CIRP –

After initiation of the CIRP, Committee of Creditors (CoC) is constituted under section 21 of the IBC. The CoC mostly consists of only financial creditors and the operational creditors have no voting rights, however in cases where there is no financial creditors, the operational creditors forms part of the CoC. The operational creditors are also stayed from taking any legal actions against the corporate debtor due to the moratorium u/s14 of IBC, 2016.  As moratorium is initiated to put a hold on any legal proceedings against corporate debtor. Though the operational creditors are invited to be a part of CoC meetings when the aggregate dues exceed 10% of the total debt owed by the corporate debtor, the invitation does not extend to any voting right. The voting powers given to the financial creditors under section 21 of the code, are effectively to dominate and discriminate against the operational creditors in the decision making.

Differential Treatment under Section 53 of IBC –

Section 53 of the IBC lays down the waterfall mechanism for distribution of assets during liquidation of the corporate debtor. It clearly distinguishes between secured financial creditors, unsecured financial creditors, and operational creditors, placing operational creditors lower in priority for distribution of proceeds from sale of assets.

A major concern arises where the operational creditors are provided only the “liquidation value” under a resolution plan based on a restrictive interpretation of Section 30(2)(b) of the IBC. If the operational creditors consistently receive minimal recovery, it may discourage suppliers and service providers from extending credit to the corporate entities. This could lead to a commercial environment where advance payments are demanded by the operational creditors for all the transactions, which would undermine business flexibility and adversely affect the broader economy.

Therefore, while the IBC emphasizes maximization of value and revival of the corporate debtor, a balanced approach between financial creditors and operational creditors is essential. Any resolution plan that is manifestly discriminatory or unfairly prejudicial to either class of creditors may be challenged as being contrary to the objectives and provisions of the IBC.

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The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 which primarily aims at the resolution of corporate insolvency of corporate persons, partnership firms and individuals. The IBC framework is intended to facilitate the financially distressed corporate debtor and not as a mere recovery mechanism for creditors. Accordingly, proceedings before the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are resolution centred and not recovery centred.

In the real estate sector, we see that developers’ insolvencies include a large group of stakeholders which includes financial creditors, operational creditors, homebuyers, and regulatory authorities. Homebuyers, who are included in the class of financial creditors are statutorily recognised under the IBC and are entitled to participate in the Committee of Creditors through authorized representatives (AR). However, this statutory recognition does not extend to all homebuyer related entities which in particular are Resident Welfare Associations (RWAs) or cooperative housing societies, unless they independently meet the Code requirements are left out.

RWAs play a role in running the day to day affairs of residential complexes. Their functions usually include management of common areas, collection of maintenance fees, interaction with local authorities on behalf of residents, and advocacy for public services. RWAs often act as representatives of residents in issues related to living conditions and administrative coordination. Their role is primarily managerial and welfare-oriented and arises through local housing and municipal regulations, not insolvency law.

When a Real Estate company goes into insolvency we see RWAs often attempt to step in on behalf of the residents, particularly on matters relating to maintenance, possession, or completion of the project. At a practical level such association may raise concerns before the authorities or seek to represent the collective interest of the occupant, however once proceedings commence under the Insolvency and Bankruptcy Code, the rights and obligations of parties are strictly governed by the framework of the code, The NCLT and NCLAT, being statutory insolvency tribunals, operate within a limited jurisdiction and cannot entertain such types of issues which fall outside the ambit of the IBC.

Most Importantly, RWAs, merely by virtue of being representative bodies, do not qualify as financial or operational creditors unless they independently satisfy the requirements laid down under the Insolvency Code. Therefore, while RWAs may initially voice the concerns of residents, they do not possess an automatic or independent right to participate or intervene in insolvency proceedings when they are not recognised stakeholder under the IBC.

Hon’ble Supreme Court of India has settled this issue by holding that Resident Associations and cooperative housing societies do not have a determinative role in insolvency proceeding initiated against real estate developers. In the case of Elegna Co-operative Housing and Commercial Society Ltd. versus Edelweiss Asset Reconstruction Company Limited (2026 INSC 58) the Court examined that whether RWAs had a right to get involved in proceedings under Section 7 of the IBC. The Court in this instance put forth that insolvency processes are for the recognized stakeholders as per the Code. Allowing RWAs into these proceedings would introduce into the process issues which the statute did not provide for. Also, the Court made it clear that the objective of the resolution process is not to expand beyond what is contemplated under the Code.

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A major question that arises is whether the NCLT possesses the discretion either to accept or reject these applications even where it is apparent that the company is in a position where it owes money (debt) and has also failed to pay the same (default) amount.

The Vidarbha Industries case was still important to the decision because the Hon’ble Supreme Court attempted to scrutinously examine the provisions of NCLT that pertain to its powers and regarding how it has to construe the law. SC also understood that Section 7(5)(a) of the IBC employs the word “may” instead of “shall” in which case, the ‘NCLT is not bound to accept every application. This ruling proved that the NCLT has the discretion i.e. to accept or reject an application for initiation of the CIRP despite the presence of evidence of debt and default. However, this power has to be exercised most cautiously by the NCLT regarding the peculiarity of each particular case.

This decision in the Vidarbha Industries case was later questioned in another case, M. Suresh Kumar Reddy v. Canara Bank. In this case, the Supreme Court agreed with the decision made in Vidarbha Industries but cautioned that it should not be seen as conflicting with earlier cases like E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. The court clarified that the discretionary powers discussed in Vidarbha Industries were specific and limit to the facts of that particular case.

Insofar as it remains, the law now bears witness to the fact that the discretion has vested in the NCLT in terms of Section 7(5)(a) of IBC to accept or reject a petition for initiation of the CIRP even if there is evident existence of debt and default. Nonetheless, discretion should be exercised well taking into account the specific facts of each case. The existing issue is that by the time the Supreme Court gives its verdict on the “Maganlal Daga Huf v. Jag Mohan Daga” case there are apprehensions regarding the effect of the Vidarbha Industries on the structure of the IBC, 2016. In light of the current legal position, the law reinforces that under S. 7(5)(a) of the IBC, the NCLT bears the discretionary jurisdiction to accept or reject a petition to initiate the CIRP. Despite there is evident proof of debt and default. Nonetheless, the issue is that this discretion has to be employed diligently, especially because each case may be entirely different from the other. That being the case, there is apprehension of shifting dynamics of the larger framework of IBC, 2016 as a consequence of the ruling in Vidarbha Industries Limited case, till the resolution of the case of the “Maganlal daga Huf & Anr. V. Jag Mohan Daga”.

Later on, in “Innoventive Industries Ltd. v. ICICI Bank”, SC appreciated the fact that once debt and default have been proved, and then the process of CIRP must begin and termed it as mandatory, cementing the urgency of the process for quick disposal of insolvency cases. While making its decisions the NCLT uses several factors in the process of making the final decision and granting the desired discretion. Such factors are the ability to pay by the debtor, the existence of some real issues as to the debt, and abuse of the application process. The NCLT also tends to the interests of creditors and employees as well as to the consequences of a given decision on the industry and economy.

Thus, the NCLT’s decisions are grounded in prior court precedents and the primary objectives of the Insolvency and Bankruptcy Code [IBC]. This means that in the consideration of the case, all the provisions of the IBC must be adhered to together with the fact that the tribunal has to dispense justice based on the facts of each specific case in a manner that does not stray from the legal provisions. An instance of how this plays out is the Vidarbha Industries ruling. Coupled with such cases as “Maganlal Daga Huf v. Jag Mohan Daga”, insolvency law is always in a state of dynamics. It demonstrates how the courts must scrutinize and offer directions to how the law is applied so that it remains relevant to the current occurrences and still useful.

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At its core, insolvency law navigates the delicate balance between creditor protection and debtor rehabilitation. Traditional methods rely heavily on human expertise to interpret vast amounts of financial data, assess risk, and formulate strategies. However, this approach is not without its limitations—subjectivity, inconsistency, and time constraints often plague the process. Here, AI emerges as a game-changer.

Moreover, AI augments risk assessment and prediction, providing insights that enhance the efficacy of insolvency proceedings. By analyzing historical data and market trends, AI systems can forecast potential outcomes, empowering stakeholders to devise proactive strategies and mitigate risks effectively. This predictive capability not only streamlines decision-making processes but also enhances the overall transparency and accountability of insolvency proceedings.

AI is incredibly helpful for litigants who have physically or electronically sat in court, experienced the weight of their clients’ needs, and diligently prepared for a hearing before a real judge, but it is in no way able to satisfy the court’s requirements on its own. A court may, for instance, interrupt the senior attorney with the most expertise during their closing arguments, ask any question, clarify anything, and then expect a convincing answer. There isn’t time to create your own response right now, nor is there time to check ChatGPT.

Furthermore, AI facilitates the automation of routine tasks, freeing up valuable human resources to focus on strategic initiatives and complex legal matters. Document review, case analysis, and compliance monitoring are just a few areas where AI-driven automation can significantly improve efficiency and reduce operational costs.

However, as with any technological advancement, the integration of AI into insolvency law is not without challenges. Concerns regarding data privacy, algorithmic bias, and regulatory compliance must be addressed to ensure the ethical and responsible use of AI in insolvency proceedings.

In conclusion, the convergence of insolvency law and artificial intelligence represents a transformative paradigm shift in the legal landscape. By harnessing AI’s analytical prowess and automation capabilities, stakeholders can navigate insolvency proceedings with unprecedented efficiency, accuracy, and transparency, ultimately fostering a more robust and resilient financial ecosystem.

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Challenges:

1. Legal Complexity and Interpretation: The I&B Code is a comprehensive legislation, but its implementation involves navigating complex legal interpretations and addressing ambiguities. Courts have been instrumental in interpreting provisions, which has led to delays and uncertainties in the resolution process.
2. Operational Delays and Backlog: One of the critical challenges faced in implementing the I&B Code is the operational delays and backlog of cases. The infrastructure for handling insolvency proceedings, including the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI), has faced capacity constraints, leading to delays in resolving cases.
3. Lack of Precedents and Case Law: Given the relatively recent introduction of the I&B Code, there is a scarcity of precedents and established case law. This has resulted in varied interpretations of the law and inconsistent outcomes in different cases, affecting the predictability and reliability of the resolution process.
4. Stakeholder Coordination and Cooperation: Effective resolution under the I&B Code requires cooperation among various stakeholders, including creditors, debtors, resolution professionals, and regulatory authorities. Coordination challenges among these stakeholders can hinder the timely resolution of insolvency cases.
5. Financial Sector Readiness: The effectiveness of the I&B Code is closely linked to the readiness and capacity of the financial sector to participate in the resolution process. Building capabilities among lenders and financial institutions to assess distressed assets and engage in restructuring efforts remains a challenge.

Opportunities:

1. Promoting a Culture of Corporate Discipline: The I&B Code has instilled a sense of corporate discipline by emphasizing the timely resolution of financial distress. Companies are incentivized to resolve their financial issues promptly to avoid stringent consequences under the insolvency process.
2. Enhancing Credit Availability: A robust insolvency framework improves credit availability by reducing the risk perception among lenders. Clearer resolution mechanisms under the I&B Code encourage creditors to extend credit with greater confidence, supporting economic growth and investment.
3. Encouraging Entrepreneurship and Innovation: The I&B Code provides a structured exit mechanism for failed businesses, allowing entrepreneurs to learn from failures and explore new opportunities. It promotes a dynamic business environment where innovation and risk-taking are essential components of economic growth.
4. Attracting Investment and Enhancing Market Confidence: A transparent and efficient insolvency framework attracts domestic and foreign investments by providing clarity and predictability in resolving distressed assets. This enhances market confidence and strengthens India’s position as an attractive investment destination.
5. Policy Reforms and Continuous Improvement: Recognizing the challenges faced in implementation, policymakers have been proactive in introducing reforms to streamline procedures and address operational bottlenecks. Continuous improvement in the regulatory framework and infrastructure can further enhance the effectiveness of the I&B Code.

Conclusion:

The Insolvency and Bankruptcy Code represents a paradigm shift in India’s approach to resolving financial distress and revitalizing businesses. While challenges such as legal complexity, operational delays, and stakeholder coordination persist, the I&B Code also presents significant opportunities for promoting corporate discipline, enhancing credit availability, and attracting investment. As implementation evolves and reforms are introduced, ensuring a balanced approach to addressing challenges while leveraging opportunities will be crucial in realizing the full potential of the I&B Code and supporting sustainable economic growth.

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The distribution of the proceeds from the sale of the liquidation assets shall be distributed in the order of priority as per Section 53 of IBC, 2016. However, the Section 36 (4) of IBC, 2016 excludes from Liquidation Estate all the sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund.

The Apex Court i.e. Supreme Court has categorically held that Section 53(1) of the IBC shall not apply to PF, Gratuity and Pension dues, which are to be treated outside the liquidation process and liquidation estate assets under the IBC since Section 36(4) of the IBC has given outright protection to the workmen’s dues under the provident fund, the pension fund and the gratuity fund, which are not to be treated as liquidation estate assets and the liquidator shall have no claim over such dues.

In Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhawchharia Resolution Professional of Jet Airways, the hon’ble NCLAT harmoniously construed Section 36 and Section 18 of the Code to conclude that EPF dues do not fall under the scope of the term ‘assets’ even during the CIRP and, therefore, the IRP cannot alienate or transfer such assets. The NCLAT observed.

“…the said funds i.e., provident fund, pension fund and gratuity fund maintained by the corporate debtor, have to be utilized fully for payment of provident fund, pension fund and gratuity fund of the workmen and employees and thus, these assets cannot be included in the information memorandum as the assets of the corporate debtor, while inviting the resolution plan”

Further, the Hon’ble NCLAT in Tourism Finance Corporation of India Ltd. vs Rainbow Papers Ltd. has explicitly held that since no provisions of the Code and the EPF Act are in conflict, the application of Section 238 of the Code does not arise. The Apex court concurred with the reasoning set out by NCLAT and refrained from interfering with the judgment, ultimately dismissing the appeal.

Therefore, as the provisions of IBC do not override the EPF Act it becomes pertinent to note the relevance of Section 17B of the EPF Act. Section 17B of the EPF Act creates an obligation on the transferee to pay the contribution and other sums due from the employer whenever an establishment is transferred. Therefore, by operation of Section 17B of the EPF Act, the successful resolution applicant is made liable to pay the provident fund that the corporate debtor owes to its employees.

At this juncture, we can conclude that concludes that the dues of PF are not Assets of the Corporate Debtor, it is only held in trust and the beneficial owners are employees, hence the same cannot be included in the Liquidation Estate formed by the liquidator under Section 36.

It is further notable that the PF dues are to be treated as Secured as the Charge is created by operation of law as provided in Section 100 of the Transfer of Properties Act. So, the dues of PF should be given priority and be paid in full irrespective of the waterfall provided in section 53 of IBC.

Generally, the PF department prefers to submit its claim in 3 parts: One Dues of PF under Section 7A, Second interest on delayed payment under Section 7Q, and Third Penal Damages under Section 14B of EPF & MP Act,1952. Indeed, the dues under Section 7A and Section 7Q (Interest) will go to the account of the workman or employee, but the damages collected by the EPFO are only a penal provision and nothing will go to the workman and employees from the sum of damages. So harmonious reading of Section 11(2) of EPFMA and 36(4)(a)(iii) confirms that the Damages are not the dues to Workman or Employees and can be treated as Government Dues and should be categorized as Unsecured Operational Debt and be payable according to Section 53 of the IBC.

Further Section 14B Provided that the Central Board may reduce or waive the damages levied under this section in relation to an establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985, subject to such terms and conditions as may be specified in the Scheme.

However, after enforcement of IBC, the provisions of Board for Industrial and Financial Reconstruction and Sick Industrial Companies (Special Provisions) Act, 1985 were repealed and earlier statutory regime for rehabilitation is now substituted by Insolvency Regime as contained in IBC. Thus, when the Insolvency Resolution Process has been initiated against a Corporate Debtor and the Resolution plan has been approved under IBC, the power of the Central Board to reduce or waive the damages can be exercised about the damages imposed under Section 14B. Paragraph 32 of the 1952 Scheme as extracted above also contemplates a recommendation by Board for Industrial and Financial Reconstruction, 1985 Act being not in force and substituted by the Insolvency Regime there can be now no recommendation for waiver of the damages under Section 14B of the Board for Industrial and Financial Reconstruction. The power of recommendation as contemplated in paragraph 32B scheme can very well be exercised by the NCLT. Hence, SRA may make an application under Section 14B 2nd proviso for waiver of the damages under Section 14B.

Conclusion:

It can be concluded that the PF dues are to be paid in priority, but the treatment of dues under Section 14 B is conflicting as several judgments have different views and explanations and IRP/RP/Liquidator should admit EPFO dues in full including dues under 7A, 7Q, and 14B, and specify the same in the List of Creditors so the Prospective Resolution Applicant makes full provision of EPF dues and use the benefits of waiver of damages by making an application to Central Board.

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Status as on- 14/07/2023

Over the last few years, several cases of defaulting real estate companies, including major players like Amrapali, Jaypee Infratech, and Supertech, have been stuck at various stages of insolvency proceedings under the provisions of the Insolvency and Bankruptcy Code, 2016, as amended (“Code”). As per the data provided by the Insolvency and Bankruptcy Board of India (“IBBI”), a total of 344 corporate debtors engaged in construction and real estate activities have been admitted into the corporate insolvency resolution process (“CIRP”) as of September 2022.

The major challenges in the insolvency resolution of real estate companies arise from the peculiarities of this sector, especially since the divergent interests of the allottees of the real estate projects do not align with the scheme of the CIRP. The allottees’ interest lies in the ownership and possession of the unit, while the interest of the financial creditors lies in the repayment of the loan (usually with haircuts). Furthermore, one of the unique features is that due to the scale of the projects, the real estate allottees (who have been categorized as financial creditors having voting rights) usually form a majority in the committee of creditors (“CoC”); however, they do not possess the financial expertise or prudence to take decisions for assessing the feasibility and viability of the resolution plans for the revival of these companies.

Proposed Amendments in Insolvency and Bankruptcy Code (Amendment) Bill, 2023

While the courts have attempted to tailor the provisions of the Code for real estate companies, the Code itself is ill-equipped to regulate the same. Considering the need for a specialized framework to deal with such cases and the lack thereof, the Ministry of Corporate Affairs, by way of notice dated January 18, 2023, proposed introducing project-wise insolvency in cases of real estate companies. In this regard, the following amendments have been proposed:

(i) When an application is filed to initiate the CIRP in respect of a corporate debtor who is the promoter of a real estate project, and the default pertains to one or more of its real estate projects; the Adjudicating Authority, at its discretion, shall admit the case but apply the CIRP provisions only with respect to such real estate projects, which have defaulted. Accordingly, such projects shall be recognized as distinct from the larger entity for the limited purpose of resolution

(ii) The provisions of the Code as they apply to the CIRP of a corporate person shall, with necessary modifications, be made applicable to the CIRP of such real estate projects; and

(iii) Section 28 of the Code may be amended to enable the RP to transfer the ownership and possession of a plot, apartment, or building to the allottees with the consent of the CoC.

Challenges and Recommendations

The amendments have only been proposed for the introduction of project-wise CIRP and not reverse CIRP. While project-wise CIRP is a welcome move, it is recommended that the Code should provide a statutory framework for reverse CIRP as well. In cases such as Umang Realtech, the Hon’ble NCLAT had allowed both project-wise and reverse CIRP in order to ensure that the overall interests of the homebuyers and the financial institutions are served.

Further, it is imperative that the provisions enabling project-wise insolvency should be carefully worded. The legislature and the insolvency courts need to bear the following in mind in cases of project-wise insolvency:

(i) Since all the projects are still under one company, there may be challenges in having operational control through IRP on the projects undergoing CIRP e.g. clarity on whether the board of directors will remain suspended or IRP to run the entire Company, ability to bind the Company with the decisions of the CoC for the projects undergoing CIRP.

(ii) Complications may arise while analyzing avoidable transactions of the projects undergoing CIRP as such transactions may have a carry-over to the projects outside the CIRP.

(iii) Real Estate (Regulation and Development) Act, 2016 (“RERA”), which has been enacted in order to ensure efficiency and transparency in the real estate sector, envisages certain compliances to be followed by the real estate company such as 70% of the amounts collected for one project is utilized only for the cost of construction and towards the land cost. While the IRP may adhere to this requirement, no monitoring mechanism is in place to ensure that the ex-management complies with this requirement for the projects kept outside CIRP.

(iv) Clarity on bifurcation of creditors (for example operational creditors, employee dues) for each project.

Conclusion

Introducing a robust mechanism in the Code for project-wise CIRP and reverse CIRP is the most appropriate solution for the problems faced by real estate stakeholders, especially financial creditors and homebuyers. While an enabling provision for the Adjudicating Authority to initiate project-wise insolvency and/or reverse insolvency is important, it is equally imperative that the Code should have sufficient safeguards in order to ensure that the aim of the Code is not defeated and the interest of the allottees is preserved.

Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at ibc@centrik.in

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Status as on: 14/07/2023

WHAT IS FTCIRP (Fast Track Corporate Insolvency Resolution Process)?

Chapter IV (Sections 55 to 58) of the Insolvency and Bankruptcy Code, 2016 explicitly provides for a fast-track corporate insolvency resolution process (CIRP) for certain eligible companies. The fast-track CIRP is designed to expedite the insolvency process for smaller companies and enable their efficient restructuring or liquidation. In simple words, this procedure aims to eliminate the excess delay in the insolvency process of a small-scale company, which does not require a large number of days for winding up.

WHO IS A CORPORATE DEBTOR IN A FTCIRP? (Section-55)

An application may be made in respect of the following corporate debtors-

1. A Small-sized company (as defined under Section 2 clause (85) of the Companies Act, 2013);
2. A startup other than a partnership firm (as defined by the Ministry of Commerce and Industry);
3. An unlisted company with total assets of less than one crore rupees (as reported in the financial statement of the preceding financial year).

WHAT IS THE TIME PERIOD FOR COMPLETION OF FTCIRP? (Section-56)

FTCIRP must be completed within 90 days from the insolvency commencement date and a further extension of 45 days can be granted by the NCLT only once, by a vote of 75% of the Committee of Creditors (CoC).

HOW FTCIRP IS INITIATED? (Section-57)

To initiate a fast-track CIRP, an application shall be made filed by a creditor (including both financial as well as operational creditors) or a corporate debtor and the following documents must be annexed-

• Proof of the existence of default upheld by the records available with the information utility.
• Any such other information specified by the Board.

WHAT IS THE PROCEDURE FOLLOWED DURING FTCIRP? (Section-58)

Step– I- Filing of an application for initiating FTCIRP as per section 57 of the Code.

Step– II- Appointment of an IRP by the Adjudicating Authority.

Step– III- Public Announcement made by the IRP within three days of his appointment.

Step– IV- Submission of claims of all, within 10 days of the appointment of IRP and verification of the submitted claims within 7 days of submission of the last claim.

Step-V- Formation of Committee of Creditors (CoC) and meetings are conducted by the Resolution Professional.

Step-VI- Appointment of a Registered Valuer within 7 days of appointment of RP, for determining the fair value for the assets of CD.

Step– VII- Formation of a Resolution Plan.

Step-VIII- Submission and Approval of the Resolution Plan by the Adjudicating Authority.

CONCLUSION:

The concept of fast-track corporate insolvency resolution process has been introduced in the Insolvency and Bankruptcy Code, 2016 to skip the long-lasting legal battles with various courts and to fasten the insolvency resolution process of small-sized firms, which does not require a large number of days for completing their insolvency process. The best thing about FTCIRP is that the procedure followed is the same as a regular CIRP but it is revved to wind up in a shorter span of time.

Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at ibc@centrik.in.

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Status as on- 13/04/2023

The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that has been set up under the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT has jurisdiction over corporate insolvency, among other matters.

There is no specific threshold limit for the NCLT Delhi under the IBC 2016. The IBC provides that a financial creditor, operational creditor, or the corporate debtor itself can initiate the insolvency resolution process with the NCLT for any default amount above Rs. 1 lakh. The NCLT can admit or reject the insolvency application based on certain criteria, such as the existence of a default, the viability of the corporate debtor, and other factors.

However, as per the new judgment, there is a threshold limit for initiating the corporate insolvency resolution process which is as follows:

• Financial Creditors: A financial creditor can initiate the insolvency resolution process against a corporate debtor if the default amount is at least INR 1 crore.
• Operational Creditors: An operational creditor can initiate the insolvency resolution process against a corporate debtor if the default amount is at least INR 1 crore.
• Corporate Debtor: A corporate debtor can initiate the insolvency resolution process against itself if the default amount is at least INR 1 crore.

It is important to note that the default amount must be due and payable, and there must be no dispute regarding the default amount. If the default amount is less than the threshold limit, the creditor or debtor may need to explore other options for recovering the outstanding amount.

Nevermore, in the case where the pleas were filed on or before 24.03.2022, the authority observed that:

Case-

Metal’s & Metal Electric Pvt. Ltd. Vs. Goms Electricals Pvt. Ltd.

Facts of the Case–

In the instant case, the applicant had sold and supplied the goods as an operational creditor to the corporate debtor and the corporate debtor had received, accepted and utilized those goods. The corporate debtor had never raised any dispute as to the quality or quantity of the material supplied.

The operational creditor had issued a demand notice dated 10-10-2020 u/s 8 of the IBC to the corporate debtor. On the corporate debtor’s failure to pay, the operational creditor filed an application u/s 9 of the IBC.

NCLT Held-

The NCLT observed that the amount claimed was in a sum of Rs. 17,91,112 and on and from 24-3-2020 the pecuniary jurisdiction for entertaining the petition under the provisions of sections 7, 9, and 10 stands in relation to threshold limits increased from Rs. 1,00,000 to Rs. 1,00,00,000.

The NCLT held that the petition was filed on 12-3-2021 i.e much after 24-3-2020 being the date of increase of the threshold limit and thus, in the circumstances, it had no jurisdiction to entertain the petition and was constrained to dismiss the same for ‘lack of pecuniary jurisdiction’.

Thereafter, an appeal was made to the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT.

The operational creditor contended that the amount in default was Rs. 17,91,112 and the correct interpretation of the Notification dated 24-3-2020 was that in case of ‘default’ that takes place on or after 24-3-2020, the threshold limit would be Rs. 1,00,00,000. As such, if a ‘default’ had been committed by a ‘corporate debtor’ before the issuance of the Notification i.e., prior to 24-3-2020, then, for the purpose of initiation of CIRP u/s 9 of the IBC the threshold limit would be considered as Rs. 1 lakh.

The NCLAT observed that section 4 of the IBC specifies the minimum threshold limit of Rs. 1,00,00,000 for the default and in fact, the Central Government had raised the limit from Rs. 1,00,000 to Rs. 1,00,00,000 as per Notification No. S.O 1205 (E), dated 24-3-2020.

The NCLAT, further observed that the date of initiation of CIRP shall be the date on which an application was made. To put it precisely, ‘the date of default’ is not to come into ‘operative play’ and the same ought not to be taken into account for anything but computing the period of limitation.

The NCLAT held that the threshold limit of Rs. 1 crore specified in Notification No. 1205(E), dated 24-3-2020 will be applicable for applications filed u/s 7 or 9 on or after 24-3-2020.

Further, the NCLAT held that where application u/s 9 of the IBC was filed on 12-3-2021 involving debt lower than the threshold limit, the said application was not maintainable because of lack of pecuniary jurisdiction.

Thus, the impugned order passed by the NCLT dismissing said section 9 application was free from legal infirmities.

Disclaimer– The above article is based on the personal interpretation of related laws, which may differ from person to person. The readers are expected to take expert opinion before relying on this article. For more clarification, the readers can be expected at support@centrik.in  

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Status as on- 31/03/2023

The reverse Corporate Insolvency Resolution Process (CIRP) in India is a relatively new legal concept that has been introduced recently. This process is nowhere mentioned in IBC.  It allows a company to propose a repayment plan to its creditors in order to settle its debts and avoid being declared insolvent.

The validity of the reverse CIRP process in India depends on various factors, including the adherence to legal provisions, the efficacy of the process, and the willingness of creditors to accept the repayment plan proposed by the company.

The success of the process also depends on the willingness of creditors to accept the repayment plan proposed by the company. If creditors are not satisfied with the proposed plan or if there are disputes regarding the repayment plan, the process may face legal challenges.

In India, once the CIRP process is initiated, it cannot be reversed or withdrawn except in very specific circumstances.

According to Section 12A of the Insolvency and Bankruptcy Code, 2016, the CIRP can be withdrawn if the financial creditor, the operational creditor, or the corporate debtor itself proposes a resolution plan before the issuance of the invitation for expression of interest, or before the preparation of the information memorandum.

In addition, the National Company Law Tribunal (NCLT) has the power to withdraw the CIRP in case of any material irregularity or fraud committed during the initiation of the CIRP process.

However, once the CIRP process has reached a certain stage, it cannot be withdrawn or reversed. Therefore, it is important to carefully evaluate the situation and seek legal guidance before initiating the CIRP process in India.

In the case of Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd, the Hon’ble NCLAT took a practical approach with the intention of saving both, the interest of stakeholders and the survival of the business. Reverse Insolvency can be termed as a part of the Corporate Insolvency Resolution Process (CIRP), Reverse Insolvency process is done in the case of a real estate company, when in a real estate project any promoter or developer wants to remain outside the Corporate Insolvency Resolution Process but intends to act as a backer or lender by suffusing cash flow. This act of the promoter gives two major benefits. The first one is that the Corporate Insolvency Resolution Process (CIRP) reaches success and the second is that the project is completed without any difficulties and homebuyers would also be satisfied.

In the case of M/s. Sheltrex Developers Pvt. Ltd. Vs. M/s. Tata Capital Housing Finance Ltd. the NLCT, Chennai Bench held that IBC, 2016 does not provide for “Reverse CIRP,” hence such a mechanism is outside its purview. The Court dissented with the Flat Buyers’ case and held it could not be applied as precedent in the present scenario.

In the case of Ram Kishor v. Union Bank of India (1965), the NCLAT limited Supertech’s CIRP to one project itself. The NCLAT, Delhi, allowed Supertech Ltd. to finish the project by limiting the insolvency proceedings against it by applying the “Reverse CIRP” concept, thereby allowing the company to remain in charge of the execution of the project and letting the original promoter exist.

Conclusion

In conclusion, we can say that Reverse CIRP is a win-win process for homebuyers as well as for project developers, till now we can say that reverse CIRP is good but it is not a secure process and, in most situations, the promoter is failed to give investments as an outside financial Creditor. So, all together we can say that Reverse CIRP is still in an experimentation process and we should wait for more cases in which Reverse CIRP is applied and then observe its effect.

Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at rera@centrik.in & ibc@centrik.in

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