The enactment of Insolvency and Bankruptcy Code was a landmark legislation in India’s Insolvency regime to consolidate and amend the law relating to re-organisation and insolvency resolution of corporate persons, individuals and partnership firms in a time bound manner. It aims to promote entrepreneurship, maximize the value of assets, ensure the availability of credit and balance the interests of all stakeholders. This Code has made a significant shift from debtor in possession to a creditor-in-control regime which is designed to provide a time bound resolution for insolvent companies.
Insolvency and Bankruptcy Code also deals with the Concept of Corporate debtor whose financial distress initiates the insolvency process. The Code aims not only to address the interests of the creditors but also to ensure the revival and continuation of the Corporate Debtor.
Meaning of Corporate Debtor in IBC
Under the IBC (2016) , a Corporate Debtor is defined as a Corporate Person who owes a debt to any person as defined under Section 3(8). Section 3(7) defines the term Corporate Person broadly as a Company (as defined under Companies Act, 2013), Limited Liability Partnership (as defined under the Limited Liability Partnership Act, 2008) , and any other entity incorporated with limited liability under any law.
This definition has three elements:
- The entity must be a Corporate Person ( Company, LLP , etc)
- There must be a existence debt.
- The debt must be owed to any person (Operational or financial creditor)
This broad definition covers any Corporate entity in default can be brought within the scope of the code.
Example:- XYZ Pvt. Ltd. Takes a loan of ₹15 crore from a bank. Due to financial difficulties, it fails to repay the loan. Here, default triggers the initiation of proceedings by Financial Creditor under IBC, 2016.
Position of Corporate Debtor in IBC, 2016
IBC has the altered the position of Corporate Debtor from debtor in possession to Creditor in Control. Through the enactment of IBC, 2016 IBC displaces the management of the Corporate debtor upon the commencement of Corporate Insolvency Resolution Process.
Upon the Initiation of Insolvency proceedings under Section 7, 9 or 10 of the IBC Code, 2016 , the following situations arises:
1. Powers of Interim Resolution Professional: The powers of the Board of directors of the Corporate debtor are suspended and taken over by vesting the power in the Interim Resolution Professional (IRP) under Section 17.
2. Moratorium: Upon admitting the Application by NCLT, Moratorium is declared by prohibiting the institution or continuation of suits, transfer of assests, security interest enforcement and recovery of property occupied by corporate debtor by owners/ lessors to ensure the assert preservation under Section 14 .
3. Management by Resolution Professional (RP): As a ongoing concern, RP takes over the management and operations of Corporate Debtor.
4. Committee of Creditors (COC): The financial creditors form the COC to exercise the commercial wisdom in deciding the fate of the Corporate debtor.
This framework has made a significant shift for Corporate Debtor from being a decision maker to subject of the Insolvency process , though it continues as a going concern during CIRP.
Initiation of Proceedings under Corporate Debtor
The procedure of Corporate Insolvency Resolution Process (CIRP) under the IBC can be initiated to address the insolvency of a Corporate debtor.
CIRP can be initiated by :-
- A Financial Creditor, under Section 7 of IBC
- An Operational Creditor, under Section 9 of IBC (or)
- Voluntary Initiation by Corporate Debtor itself or through a Corporate Applicant, under Section 10 of IBC
The threshold limit for initiating CIRP against a corporate debtor is a minimum default of 1 crore by the Corporate debtor.
Process after Filing of CIRP
CIRP commences with the submission of an application by the Financial Creditor and Operational Creditor to the National Company Law Tribunal (NCLT) which is a adjudicatory body having jurisdiction over insolvency resolutions and liquidations for corporate entities.
The application of Financial Creditor must be accompanied by evidence of default with the records of such default recorded with an Information Utility or any other evidence specified under IBC.
Before proceeding with the application, Operational Creditors are additionally required to deliver a demand notice to the corporate debtor.
The Corporate Insolvency Resolution Process should be completed within a period 180 days ( 180 –330 days) from the date of admission of the application to initiate such process as mentioned under Section 12 of IBC, 2016.
Under Section 12A, CIRP application can be withdrawn with 90% approval of Committee of Creditors (C0C) if the debt is settled.
Key Legal Provisions Governing Corporate Debtor under IBC , 2016
- Section 7, 9 and 10 :- Provides for Initiation of Insolvency Proceedings against Corporate Debtor
- Section 14:- It imposes a Moratorium to protect the Corporate Debtor and its assets by ensuring value maximization.
- Section 17 & 18 :- These sections transfer the management to the IRP and outlining the duties related to management of assets.
- Section 20:- his section mandates the RP/IRP to protect and preserve the value of Corporate Debtor and continue it as a ongoing concern.
- Section 25:- It outlines the duties of RP in managing the Corporate Debtor.
- Section 29A:- It disqualifies Certain Persons from submitting resolution plans ensuring that defaulting individuals cannot buyback their company at a reduced price.
- Section 30& 31 :- These sections governs the submission, approval and sanctioning of a resolution plan.
- Section 33 :- It dictates the initiation of liquidation process of a Corporate debtor, if resolution plan fails.
These provisions ensure that the assets of corporate debtor are preserved, liabilities are assessed and resolution is approved in a legal and time bound manner
Landmark Judgements Governing Corporate Debtor under IBC, 2016
M/S. Innoventive Industries Ltd vs ICICI Bank & Anr (2017)
It is a landmark judgement where Court upheld the constitutional validity and overriding effect over other statues under Section 238 by marking a shift from debtor in possession to creditor in possession.
Committee of Creditors of Essar Steel India Limited (2020)
Court upheld the Supreme Authority of COC in approving the resolution plans by establishing that Courts cannot interfere with the commercial wisdom of COC except with the limited legal rounds.
Swiss Ribbons Pvt. Ltd. vs Union Of India , (2019)
Supreme Court upheld the classification between financial creditors and Operational Creditor as reasonable by confirming the legislative intent of the code as it aims at the resolution and not recovery.
Lalitha Kumar Jain v UOI (2021)
Court held that the approval of the resolution plan for a corporate debtor does not automatically extinguishes their liabilities towards the Personal guarantors which can be done independently even after approval.
Vallal RCK v. Siva Industries and Holdings Limited , (2022)
Court upheld the paramount importance of COC under Sec 12A and held that neither the learned NCLT nor the learned NCLAT were justified in not giving due weightage to the commercial wisdom of CoC.
Vishnoo Mittal v. M/s Shakti Trading Company , (2023)
Court held that director cannot be held liable under Section 138 of the NI Act for chques dishonored after the commencement of a moratorium as they loose control over the management of corporate debtor property and accounts.
Conclusion
The Corporate debtor has undergone a significant transformation under IBC 2016 from debtor in possession to creditor in possession by ensuring economic efficacy. The legal provisions of IBC along with the Supreme Court jurisprudence has established a framework that prioritizes Resolution over liquidation in a time bound and structured manner but it raises concerns about Scope of judicial oversight over COC and exclusion of genuine promoters under Section 29A.
