Corporate Insolvency Resolution Process Indicative MCQs

The Corporate Insolvency Resolution Process is a recovery mechanism for the creditors of a corporate debtor. A corporate debtor means a company or Limited Liability Partnership that owes a debt to its creditors. Even if the default is willful, i.e., when the corporate debtor has the means to pay but chooses not to, CIRP can be initiated.

Corporate Insolvency Resolution Process

As a result, the focal point of the IBC is the default of a payment obligation. The Insolvency and Bankruptcy Code, 2016 lays down the provisions for conducting insolvency or bankruptcy of individuals, partnership firms, LLP and companies. However, the process of insolvency and liquidation of corporate debtors under the Insolvency and Bankruptcy Code applies where the minimum default amount is Rs.1 crore only.

Creditors Under The Insolvency and Bankruptcy Code

When a company or LLP becomes insolvent or commits a default, the financial creditor, operational creditor or the corporate debtor can file an application to initiate the Corporate Insolvency Resolution Process by the Adjudicating Authority, i.e. National Company Law Tribunal.

A financial creditor is a person to whom the business owes a financial debt and includes a person to whom such debt is legally transmitted or assigned. A financial debt means a debt along with interest disbursed against the consideration for the value of money and includes-

• The amount borrowed against the payment of interest.
• The amount raised by acceptance under the acceptance credit facility or its dematerialized equivalent.
• The amount raised under the note purchase facility or the issue of notes, bonds, loan stock, debentures or any other similar instrument.
• The amount of the liability relating to a lease or hire purchase contract that is deemed as capital or finance lease under the Indian Accounting Standards or such other accounting standards.
• Receivables discounted or sold other than the receivables sold on a non-recourse basis.
• The amount raised under any other transaction, including any purchase agreement or forward sale having the commercial effect of a borrowing.
• Any derivative transaction entered in connection with benefit from or protection against fluctuation in any price or rate.
• Any counter-indemnity obligation relating to a bond, indemnity, guarantee, documentary letter of credit or other instrument issued by a financial institution or bank.
• The amount of liability relating to any of the indemnity or guarantee for any of the points mentioned above.

An operational creditor is a person to whom the business owes an operational debt and includes persons to whom such amount has been legally transferred or assigned for services or goods given by them. An operational debt means a claim relating to the provision of services or goods, including debt or employment regarding payment of dues arising under any law in force and payable to the Central Government, State Government or local authority.

Process of Corporate Insolvency Resolution

The conduct of the Corporate Insolvency Resolution Process of a corporate debtor is provided in Part II of the Insolvency and Bankruptcy Code, which are as follows-

Initiation of Corporate Insolvency Resolution Process

• The financial creditor can initiate the Corporate Insolvency Resolution Process against the corporate debtor by applying to NCLT. The operational creditor should first give a demand notice of an unpaid invoice to the corporate debtor demanding the default payment amount. When the operational creditor does not receive payment from the corporate debtor after the expiry of ten days of delivery of the demand notice or invoice demanding payment, he can apply to NCLT for initiating the Corporate Insolvency Resolution Process.
• A partner or member of the corporate debtor authorized to initiate Corporate Insolvency Resolution Process or a person in charge of managing the affairs or who has control and supervision over the financial affairs of the corporate debtor can initiate the Corporate Insolvency Resolution Process with NCLT.
• NCLT will pass an order within fourteen days of either admitting or denying the CIRP application. The Corporate Insolvency Resolution Process will commence from the admission date of the application by NCLT. The CIRP completion period is 180 days from the admission date of the CIRP application.