INTRODUCTION HOW CAN A COMPANY FILE FOR INSOLVENCY IN
When financial challenges mount and liabilities exceed assets, a company may face the daunting prospect of insolvency. Understanding the intricacies of insolvency can make a significant difference in navigating these troubled waters. This guide explains how can a company file for insolvency, equipping businesses with the knowledge to make informed decisions while minimizing damage.
What is a company which go for insolvency?
A company is a legal entity formed by individuals, groups, or organizations to carry out business or industrial activities. It operates as a separate legal entity distinct from its owners, meaning it has its own rights, liabilities, and obligations. Companies are created under specific legal frameworks and are governed by company law in their respective jurisdictions.
What is company insolvency?
A company is considered insolvent when it either:
- Doesn’t have enough assets to cover all its debts, or
- Cannot pay its debts on time.
When a company becomes insolvent, it has to follow certain legal procedures, such as administration (trying to save the company) or liquidation (selling off its assets to pay debts).
Company directors (the people who manage the company) must know when their company is insolvent. If they continue running the business while knowing there’s no realistic way to avoid insolvency, they can be held legally responsible. This is called wrongful trading.
In some cases, directors can voluntarily start insolvency procedures to address the situation. However, creditors (the people or businesses owed money) can also go to court to force the company into insolvency if they are not paid.
What is corporate insolvency?
Corporate insolvency is a state where a corporate person fails to pay debt, whether whole orany part or installment, when due and payable.
Corporate Insolvency Resolution Process (CIRP)
What is Corporate Insolvency Resolution Process (CIRP)?
CIRP stands for Corporate Insolvency Resolution Process, which is a legal process to help a company in financial trouble resolve its debts or go into liquidation.
How is CIRP Started?
By a Financial Creditor: A financial creditor (someone who gave a loan to the company) can directly apply to the National Company Law Tribunal (NCLT) to start the process.
By an Operational Creditor: An operational creditor (someone who provided goods or services but hasn’t been paid) must first send a demand notice to the company asking for payment. If the company doesn’t pay within 10 days, the creditor can apply to the NCLT to start CIRP.
By the Company Itself: The company’s partners, directors, or anyone authorized to handle its finances can also apply to start CIRP with the NCLT.
What Happens After Filing?
- The NCLT has 14 days to either:
- Approve the application and start CIRP, or
- Reject the application if it doesn’t meet the legal requirements.
- If approved, the CIRP officially begins from the date of approval.
How Long Does CIRP Last?
The entire process must be completed within 180 days from the date the NCLT approves the application. In short, CIRP is a structured way to deal with a company’s financial problems, and creditors or the company itself can ask NCLT to start the process. The goal is to either resolve the debts or close the company in an organized manner.
How to Apply for CIRP?
Step 1: Application To The NCLT: A creditor (financial or operational) or the company itself can apply to the NCLT (National Company Law Tribunal) to start the Corporate Insolvency Resolution Process (CIRP) if the company owes more than ₹1 Lakh. Financial creditors, like banks, must provide proof of default, such as reports from Information Utilities, which are entities that maintain debt records under the Insolvency and Bankruptcy Code (IBC). Operational creditors, like suppliers, must first send a demand notice to the company for unpaid dues. If the company disputes the claim (e.g., due to an ongoing disagreement), it can use this as a defense. Once the application is submitted, the NCLT must decide within 14 days to either admit or reject it, and if admitted, the CIRP process begins to resolve the company’s financial issues.
Step 2: Appointment of Interim insolvency Resolution Professional: When a company is admitted into the Corporate Insolvency Resolution Process (CIRP), its board of directors loses all power. The management of the company is handed over to an independent professional called an interim resolution professional (IRP). From that point until the end of the CIRP, the original management no longer has any control over the company’s activities. The IRP takes charge of running the company and overseeing the insolvency process.
Step 3: Moratorium: During the Corporate Insolvency Resolution Process (CIRP), a moratorium comes into effect. This is like a legal pause that protects the company (corporate debtor) from certain actions, such as:
- Starting or continuing any legal cases against the company.
- Selling or transferring the company’s assets.
- Enforcing any security interests (like mortgages or liens) on the company’s property.
- Recovering property from the company, even if someone else owns it.
- Stopping or cutting off essential goods or services the company needs to function.
This moratorium stays in place for the entire duration of the CIRP to give the company a chance to resolve its financial issues without interference.
Step 4: Verification and analysis of claims: The interim resolution professional will now summon, verify, and list any claims made by the corporate debtor’s creditors. Following that, in 30 days of acceptance into the CIRP (Corporate Insolvency Resolution Process), form the COC (Committee of Creditors), which includes all of the corporate debtor’s financial creditors.
Step 5: Appointment of the resolution professional: Once the Committee of Creditors (COC) is formed, they choose an independent person to take on the role of Resolution Professional for the rest of the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional is in charge of managing the company’s operations and handling the process of trying to find a solution to the company’s financial issues. This person could be the same individual who was initially appointed as the Interim Resolution Professional (IRP), or the COC may choose someone else to take over this role. The main job of the Resolution Professional is to guide the process and ensure everything runs smoothly during the CIRP.
Step 6: Acceptance of the Resolution Plan: When a company enters the Corporate Insolvency Resolution Process (CIRP), the creditors have 180 days to agree on a resolution plan. This plan is meant to restructure the company and solve its financial problems. Anyone—whether it’s the company’s management, creditors, or a third party—can propose a resolution plan. It’s the job of the Resolution Professional to check that the plan meets the requirements of the Insolvency and Bankruptcy Code (IBC).
If the plan is accepted by the creditors and approved by the National Company Law Tribunal (NCLT), it becomes binding on the company, its employees, creditors, and other parties involved. The Resolution Professional must also get any necessary legal approvals within one year after the plan is approved by the NCLT.
However, if no resolution plan is approved within the 180-day period, the NCLT will order the company to be liquidated. This means the company’s assets will be sold off, and the money will be shared among the creditors and other stakeholders. The Committee of Creditors (COC) will then appoint a liquidator to manage the sale and distribution of the company’s assets.[1]
Section 10 of the Insolvency and Bankruptcy Code (IBC), 2016 of India pertains to the “Initiation of Corporate Insolvency Resolution Process (CIRP) by the Corporate Debtor”. It allows a corporate debtor (i.e., a company or a limited liability partnership) to initiate its own insolvency resolution process. This provision is significant because it provides a mechanism for the debtor itself to approach the National Company Law Tribunal (NCLT) for a resolution process if it believes that it is unable to pay its debts.
Here are the key elements of Section 10 of IBC:
Filing of Application: A corporate debtor can file an application with the NCLT to begin the corporate insolvency resolution process (CIRP) against itself.
This application must be filed after obtaining a resolution passed by the board of directors or partners (in case of a company or limited liability partnership).
Contents of the Application: The application needs to be accompanied by a declaration stating that the corporate debtor has not committed any default in the payment of debts and that it is not undergoing any insolvency proceedings elsewhere.
Additionally, the corporate debtor must file documents that support its inability to pay debts.
NCLT Decision: The NCLT is required to admit the application within 14 days if it finds that the corporate debtor is unable to pay its debts and that all procedural requirements are met.
If the application is not admitted, it is rejected.
Resolution Plan: Once the CIRP begins, the corporate debtor will have a resolution professional appointed to manage the process. A resolution plan is prepared and the creditors of the debtor are consulted to agree on the plan.
Moratorium: Once the CIRP is initiated, a moratorium is declared, and no legal proceedings can be initiated against the corporate debtor regarding its financial obligations.
Section 10 is essentially designed to give corporate debtors an opportunity to resolve their financial difficulties by seeking insolvency resolution voluntarily, rather than waiting for creditors to take action against them.[2]
Insolvency Petition: What Is It and How to File One?
Insolvency happens when a person or company can’t pay off their debts because they don’t have enough money or assets. It means they are in a tough financial situation where they can’t repay what they owe. There are two main types of insolvency:
- Balance Sheet Insolvency: This happens when a person or company has more debt than assets. In other words, the value of what they own is not enough to cover all the money they owe.
- Cash Flow Insolvency: This happens when a person or company has assets but doesn’t have enough liquid money (cash or things that can quickly be turned into cash) to pay off their debts on time. They may not be able to pay the bills even though they own valuable things.
In both cases, the person or company is considered insolvent, meaning they can’t repay their debts.
Purpose of Insolvency Law The main goal of insolvency law is to help both the people or companies that owe money (debtors) and the people or companies they owe money to (creditors). The law aims to find the best way to pay back the creditors by working together. Some people who are in debt are afraid to use insolvency because they think it’s just a way for creditors to get their money back. But insolvency is not just about debt recovery; it’s a process where everyone, both the debtors and creditors, works together to find a solution that benefits everyone as much as possible[3].
Insolvency vs. Bankruptcy
| CRITERIA | INSOLVENCY | BANKRUPTCY |
| Definition | Financial state where debts can’t be paid as due. | Legal process for handling unpaid debts. |
| Scope | It happens to both individuals and businesses when they can’t meet financial obligations. | Legal status declared by a court, often as a result of insolvency. |
| Legal Status | It doesn’t always involve going to court. | It always involves formal court proceedings. |
| Outcome | Might result in repayment plans or agreements with creditors. | Usually leads to clearing debts or selling assets to pay creditors. |
| Public Record | Not always made public. | Officially recorded and accessible to the public. |
| Asset Liquidation | You don’t always need to sell assets | Sometimes requires selling assets, depending on the type |
R (on the application of C Ltd) v. Secretary of State for Business, Energy and Industrial Strategy (2020)
This case involved a company, C Ltd, challenging how insolvency laws were applied during the COVID-19 pandemic. The pandemic caused significant economic challenges, and many businesses faced financial difficulties, making it hard for them to pay off their debts.
Key Points:
- Government Intervention: The UK government introduced temporary changes to insolvency law to help companies during the pandemic. One major change was that creditors (the people or companies that are owed money) could not immediately start insolvency proceedings against businesses. This was done to prevent businesses from being forced into insolvency due to the crisis.
- Insolvency Petitions: Normally, a creditor can apply to the court to begin the process of insolvency if a company is unable to pay its debts. However, during the pandemic, the government passed laws to delay such insolvency actions.
- C Ltd’s Challenge: The company, C Ltd, argued that these changes were important because they allowed companies like theirs to delay insolvency filings. This provided breathing room for struggling businesses to try and recover without immediately being forced into insolvency.
- Court’s Decision: The High Court ruled on how these changes to insolvency law should be applied. The case clarified that during extraordinary situations, such as the COVID-19 pandemic, the government had the power to temporarily modify insolvency laws to protect businesses from insolvency filings.
In simple terms, this case was about how the government temporarily changed the rules to help companies during the COVID-19 pandemic. Normally, if a company cannot pay its debts, creditors can force it into insolvency. But during the pandemic, the government allowed businesses more time to recover without being immediately forced into insolvency. This case confirmed that such changes were necessary and clarified how the insolvency process should work during a national crisis[4]
Article By Ishika Maurya Student of NLU Jabalpur Intern At Fastrack Legal Solutions
[1]Corporate Insolvency Resolution Process – IndiaFilings
[2]https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&orderno=10
[3]https://lawrato.com/indian-kanoon/corporate-law/insolvency-petition-what-is-it-how-to-file-one-2854
[4]https://www.bailii.org/ew/cases/EWHC/Admin/2020/1303.html
