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Understanding Insolvency: Process and Protocols for Individuals and Partnerships

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Understanding Insolvency: Process and Protocols for Individuals and Partnerships

Understanding Insolvency: Process and Protocols for Individuals and Partnerships

The Corporate Insolvency Resolution Process (CIRP) is a crucial part of the Insolvency and Bankruptcy Code (IBC), which must be completed within 330 days of insolvency commencement. The IBC has significantly changed the debtor-creditor relationship, with the debtor now chasing creditors. The National Credit Rating Tribunal (NCLT) has become a trusted forum, and the capacity of the NCLT has been enhanced.

The IBC has a clear demarcation for its audience, with separate adjudicating authorities, such as the Debt Recovery Tribunal (DRT), handling cases related to defaults by individuals and partnership firms. The concerned debtor or creditor may submit the application for insolvency resolution. A resolution specialist is assigned to handle and oversee the entire process after an application is submitted to DRT. For the benefit of the person or partnership firm, the resolution specialist is essential in initiating and advancing the insolvency procedure.

The Code allows debtors to initiate insolvency proceedings for themselves or with the approval of all or majority partners. To initiate insolvency proceedings, the debtor must meet certain prerequisites, such as not being undischarged bankrupt, undergoing a fresh start process, having no insolvency resolution proceedings in progress, not undergoing bankruptcy, and having no insolvency resolution proceedings admitted within the past twelve months. Creditors can initiate insolvency resolution processes for individuals and partnership firms, either by themselves, through a consortium, or through a resolution professional. The application must include required attachments and be in the appropriate format as prescribed in the Code.

An interim moratorium applies to insolvency proceedings initiated by either party, preventing any legal action from being executed or the creditor initiating fresh action. In partnership firms, the moratorium applies to all partners. This ceases on the admission of the application by DRT.

In cases where a resolution professional files an insolvency resolution application, the adjudicating authority (DRT) must verify if there are no disciplinary proceedings against the professional within seven days of receiving the application. The board must report its decision within seven days.

In cases where a debtor or creditor initiates insolvency proceedings without a resolution professional, the adjudicating authority directs the board to nominate a professional within ten days. The board must verify there are no disciplinary proceedings and provide the appointed professional with the insolvency resolution process application.

The resolution professional may request proof of debt repayment from the debtor, highlighting the reasons for admission or rejection of the application and providing a copy of the report to the debtor or creditor.

The adjudicating authority must pass an order within 14 days after receiving the resolution professional's report, admitting or rejecting the application. If admitted, the authority may initiate negotiations between the debtor and creditors to finalise a repayment plan. The authority must provide a copy to the creditor within seven days.

The insolvency resolution process begins with a moratorium period, which ends at the end of 180 days. The adjudicating authority issues a public notice inviting creditors to submit claims within 21 days. The resolution professional is responsible for registering claims, and creditors can use electronic, courier, speed post, or registered post. The resolution professional then collates a list of creditors based on the debtor's application and claims, draughts a repayment plan that proposes debt restructuring, and grants the resolution professional various powers. The plan is submitted to the adjudicating authority within 21 days. If a meeting is needed, the resolution professional must specify the date and time and consider the convenience and availability of creditors when booking a meeting.

The resolution professional must call a committee of creditors meeting at least fourteen days in advance of the finalised date, providing notice to all creditors listed in the list. The meeting will follow the Code's procedures and allow creditors to approve, modify, or reject the repayment plan. Secured creditors are also eligible to participate. The approval of a majority of creditors, representing three-fourths of the creditors present at the meeting, is mandatory for seeking approval or modification. The resolution professional must compile a report of the meeting, detailing all decisions and discussions. The adjudicating authority will then decide whether to approve or reject the repayment plan based on the resolution professional's report. The decision will also contain directions for implementing the plan.

The repayment plan, approved by the creditors and adjudicating authority, will be implemented and monitored by the resolution professional. If any issues arise, the professional can seek directions from the adjudicating authority. The professional must complete the plan within the prescribed time limits and provide the necessary documents within 14 days. If not, they can seek an extension from the adjudicating authority. If successful, the professional can seek a discharge order for debts, provided the plan allows for early discharge or discharge upon completion. The discharge order must be provided to the board for records. The insolvency resolution process is the initial step against defaulting individuals and partnerships, and all parties involved must cooperate with the appointed resolution professional to efficiently execute the process and seek a discharge order.