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Recovery of Debts by Corporate: Insolvency and Bankruptcy Code, 2016

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Recovery of Debts by Corporate: Insolvency and Bankruptcy Code, 2016

This is very preferred mode of debt recovery when it comes to companies recovering debts from debtors who are unable to repay and fulfil their obligations due to factors like insolvency which render them incapable to do the same. When it comes to process that involves the company claiming a certain amount of debt from a debtor who has gone insolvent or bankrupt, the company becomes the financial creditor, and the debtor is known as the corporate debtor. Insolvency basically means a financial situation whereby an individual or an entity is unable to fulfil his/her financial responsibilities owing to an excess of liabilities in comparison to assets. A person may be insolvent, but not bankrupt. Bankruptcy means a legal procedure where the Court passes orders with respect to the insolvency position of an entity or an individual, and eventually passes orders for its resolution. In regard to the rules of evidence which may be applicable in such a case, the rules of the Indian Evidence Act 1872 are applicable whereby the evidences and documentary proof of the debt should be direct.

The essential steps that the company needs to follow while filing suit are:

  1. The company can initiate the case under the Section 7 of the Insolvency and Bankruptcy Code, 2016 by means of which they can file an application before the National Company Law Tribunal (NCLT) which has the jurisdiction to adjudicate the said case, seeking the initiation of a “Corporate Insolvency Resolution Process” against the corporate debtor.
  2. The company/financial creditor needs to show the presence of a debt value that is above Rs. 1,00,000 after which the NCLT passes an order regarding the acceptance of the application within 14 days.

What is the Corporate Insolvency Resolution Process?
As stated earlier, the determination of bankruptcy involves a legal procedure; this is the corporate insolvency resolution process. This process is an effective tool of debt recovery for creditors.

The above stated process involves the following steps:
a) When the Court admits the Corporate Debtor into the Corporate Insolvency Resolution Process, the board of directors are automatically suspended.
b) The management is promptly placed under the control of an independent ‘Interim Resolution Professional’.
c) Starting this point, the management no longer has any control over the affairs of the company till the cessation of the Corporate Insolvency Resolution Process.
d) Furthermore, a ‘moratorium’ is declared by the Court which lays a bar on the initiation or the continuation of any form of a legal proceeding against the corporate debtor.

The Hon’ble Supreme Court in the case of Alchemist Asset Reconstruction Company v. Hotel Gaudvan Pvt. Ltd., (IB)-23(PB)/2017 has held that, it is the mandate of the Insolvency and Bankruptcy Code, 2016, that, once the moratorium is instituted, no proceedings including arbitration can be commenced. Similarly, it was held by the Hon’ble National Law Company Appellate Tribunal, in the case of K.S. Oils v. The State Trade Corporation of India, 2018 SCC Online NCLAT 352, wherein the NCLAT, relying upon various sections of the IBC, held that the arbitration proceeding cannot be continued where the corporate insolvency resolution process was already going on.
Authored By: Adv. Anant Sharma & Abhijith Christopher

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