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Important FAQ’s

What is the difference between Insolvency, Bankruptcy & Liquidation?

In common parlance, insolvency is a state in which the financial difficulties of a company are such that it is unable to continue its operations at the current pace. This eventually leads to bankruptcy, wherein the company is legally declared incapable of repaying its dues. Consequently, the operations of the company are wound up in accordance with the governing statute, and the company goes into liquidation.

Describe the legislative framework governing insolvency in India before enactment of IBC, 2016.

·         The Presidency Towns Insolvency Act, 1909
·         The Provincial Insolvency Act, 1920
·         Companies Act, 1956/2013
·         LLP Act, 2008 for closure of LLPs
·         SARFAESI Act, 2002
·         Recovery of debts due to Banks and Financial Institutions Act, 1993

Sick Industries Companies (Special Provisions) Act, 1985

Who is a Corporate Debtor?

A Corporate Person who owes debt to any person.

Who is a Financial Creditor?

A financial creditor is someone to whom a financial debt is owed in exchange for the consideration of the time value of money. Financial creditors are those with whom the entity has a purely financial contract, such as a loan or debt security.

Who is an Operational Creditor?

An operational creditor is someone to whom an operational debt is owed due to goods or services, including payments to workers and government dues. Operational creditors are those with whom the entity has a liability arising from operational transactions.

When can CIRP be initiated?

The initiation of the Corporate Insolvency Resolution Process (CIRP) may occur when there is a minimum default amount, i.e., the failure to pay the whole or any part of a debt instalment or interest due, of Rs. 1 crore.

Who can initiate CIRP?

It may be initiated by the:
·         Financial Creditors (singly or jointly with other creditors);
·         Operational Creditors (including Government and Employees/Workmen);
·         Corporate Debtor

Who is not entitled to make application to initiate CIRP?

A Corporate Debtor:
·         already undergoing CIRP; or
·         who has completed CIRP during 12 months preceding the date of making application; or
·         who has violated any of the terms of a resolution plan which was approved 12 months before the date of making an application; or
·         in respect of whom a liquidation order has been made.
And a Financial Creditor:
·         who has violated any of the terms of a resolution plan which was approved 12 months before the date of making an application

Can the Code be triggered in case of non-payment of dues by Government Companies?

Since there is no specific exemption for government companies, the Code shall also apply to government companies.

Can IP take control of the assets in a Subsidiary?

In this scenario, the insolvency professional can only exercise control over the assets of the borrower and not over its subsidiary. In such a case, they can only act as a shareholder.

Does NCLT have powers to reject Resolution Plans?

Yes, the NCLT has the authority to reject resolution plans approved by the CoC.

Can NCLT approve a Resolution Plan which has been approved by less than 75% creditors?

No, the NCLT may only approve or reject the resolution plan that has been approved by the CoC with a 66% majority.

Can an interlocutory application for closure of CIRP be entertained if dispute has been settled between the Corporate Debtor and Creditors?

No, the Insolvency Resolution Process is not simply a recovery proceeding to collect creditors’ dues. In such cases, the Adjudicating Authority may, without waiting for the full 180 days of the resolution process, approve a resolution plan if it is satisfied that all creditors have been paid or satisfied, and then close the Insolvency Resolution Process.

Will an application in respect of debt which is time-barred under the provisions of Limitation Act, 1963, be rejected?

Yes, if a debt is time-barred as per the provisions of the Limitation Act 1963, the application will be rejected.

What shall be the treatment of a creditor who acts in the capacity of both the Financial Creditor as well as Operational Creditor for the Corporate Debtor?

A creditor who serves in the capacity of both a financial creditor and an operational creditor for the corporate debtor will be treated as a financial creditor for contracts involving financial debt owed by the corporate debtor and as an operational creditor for transactions in which operational debt is owed by the corporate debtor.

What is the impact of the Code on the existing legislations such as SARFAESI Act, SICA and Companies Act?

Existing judicial proceedings under the Companies Act will be transferred from the CLB to the NCLT in all cases, and in specific cases, from the High Court to the NCLT. Additionally, upon the declaration of a moratorium, all actions under the SARFAESI Act will be prohibited until the insolvency resolution process is completed.

Is there a distinction between the rights of Creditor on the basis of nationality?

The Code does not distinguish between domestic and foreign creditors. Any creditor, whether operational or financial, can exercise the rights available under the Code as long as the application for insolvency is made within India and complies with the provisions of the Code.

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