Laws & Legal Procedure for a One Person Company (OPC) to file for Insolvency and Bankruptcy: Lawyers Advice
The concept of a One Person Company (OPC) is such whose inclusion in the Companies Act, 2013, revolutionized the Corporate field. Section 2(62) of the Act describes it as a company that has only one person as its member. One of its most advantageous aspects lies in terms of the liability, which is limited. The flexible nature of an OPC is why entrepreneurs in their early-stage prefer it over Sole Proprietorship.
OPC has been described as a Private Company in section 3(1)(c) of the Companies Act, 2013. And matters relating to insolvency and bankruptcy of such companies are governed by the comprehensive Insolvency and Bankruptcy Code, 2016.
Meaning of the words “Insolvency” and “Bankruptcy”
Colloquially, the terms “insolvency” and “bankruptcy” are often used interchangeably. However, legally there is a thin line between the meaning of these two terms. Insolvency is a financial condition that corresponds to the company having an excess of liabilities over assets. While bankruptcy is a legal procedure where the court passes an order recognising the insolvency of the entity and subsequently passes an order for its resolution. It may be noted that being in a state of insolvency doesn’t necessarily pertain to bankruptcy.
Legal Procedure for Determining Corporate Insolvency
It is imperative to check for the company’s corporate insolvency. In this context, the company will be considered insolvent if it is incapable of paying off the debts to its creditors.
The cash-flow and the balance sheet are two important determinants here. The former assesses whether the company is or will be capable of paying off its debt. While the latter assesses whether the value of assets is more than the liabilities stated in the balance sheet. If the answer to either of them is negative, then the company is declared insolvent.
Explaining the Legal Question of Bankruptcy
The Corporate Insolvency Resolution Process(CIRP) is what helps ascertain bankruptcy. It is this process that helps in deducing whether the defaulter is capable of repayment or not. If there exists an incapacity, the company could either be restructured or liquidated. For that, some crucial steps must be adhered to.
On the occasion of a corporate becoming insolvent, the Insolvency and Bankruptcy Code, 2016 under section 6, allows a financial creditor, an operational creditor or the corporate itself to initiate this resolution. So anyone of the three can take the initiation, and since here, it is a One Person Company, it can do so by following the provisions of section 10.
Following are the steps involved in this resolution:
● Application to the Adjudicating Officer– A creditor (functional or operational) or the company itself can request the Adjudicating Officer which here is the National Company Law Tribunal(NCLT) to acknowledge the company’s entry in the resolution. To support this, the creditor must provide proof of the failure of payment of a debt which is more than 1 lakh. Then, the NCLT has 14 days to either accept or deny the application. Now, it must be noted that due to COVID-19, the Ministry of Corporate Affairs in March 2020, has increased the minimum default limit to 1 crore. This has been done to protect the interests of Micro, Small and Medium Enterprises(MSMEs).
Another crucial part of filing applications is serving of the notice and the same was emphasized in GNSQ Global Service Delivery (OPC) Private Limited V. eMatrix Knowledge Processing Solution Private Limited(CP(IB) No. 836/KB/2019). An application was filed by the operational creditor against the corporate debtor regarding the initiation of CIRP. During examination, it was found that the delivery notice wasn’t served well, which is compulsory under section 8 of the IBC. Hence, the application was dismissed.
● Provision for an Interim Resolution Professional and the Moratorium- As soon as a corporate debtor is accepted into the CIRP, the Board of Directors gets suspended. However, the suspended Board of Directors is nonetheless conferred with the right to receive insolvency resolution plans submitted before the resolution professional. The aim is to let them participate in the meetings of the Committee of Creditors effectively.
The management is controlled by an Independent Interim Resolution Professional till the end of the CIRP. Furthermore, a moratorium is constituted which continues being in force till the corporate debtor is in the CIRP. The moratorium forbids any initiation or continuance of any legal proceedings against the corporate debtor, transfer of assets, enforcement of security interests, recovery of property as an owner and discontinuance or termination of supply of basic goods and services.
● Verification of Claims- Now, the interim resolution professional starts its verification and analysis work. Creditors are called and their claims are verified and classified. Post that, a Committee of Creditors is formed within 30 days of acceptance into the CIRP which constitutes all the financial creditors.
● Appointment of Resolution Professional– The Committee of Creditors now have the choice to either appoint the interim resolution professional as a resolution professional or a new resolution professional altogether.
● Approval of the Resolution Plan– Now, the creditors get 180 days from the commencement of the CIRP to accept the plan for restructuring the corporate. This plan can be advanced by any person, management, creditor or a third party. And it is the duty of the resolution professional to see that the plan is in sync with the provisions of the Insolvency and Bankruptcy Code, 2016.
If this plan is approved and sanctioned by the NCLT, it becomes binding on everyone involved in the plan like the corporate debtor, its employees, creditors and others. And the subsequent approvals for a year are to be taken care of by the resolution professional. Conversely, if the plan is not approved, NCLT orders to liquidate the corporate debtor. Post this approval of liquidation, the Committee of Creditors appoints a liquidator to sell off the assets of the corporate debtor and distribute them according to section 53 of the Insolvency and Bankruptcy Code, 2016. To conclude, the legal procedure of bankruptcy aims to propagate a fair settlement of legal claims by the creditors. Moreover, it might not be a desirable state to be in, but it is not a dead-end either. There are always avenues for entrepreneurs to restart their enterprises.
Authored By: Adv. Anant Sharma & Ayushi Shrivastava