Why was Fast Track Corporate Insolvency Resolution Process introduced?

Fast Track Corporate Insolvency Resolution Process was introduced in India following the Bankruptcy Law Reforms Committee report, which remarked that the timeframe for insolvency resolution process for certain classes of corporates can be shortened, thereby introducing a new framework. The timeframe for insolvency resolution process of the Corporate Debtor is 180 days as per the provisions of the Insolvency Bankruptcy Code, 2016 (Code) and Regulations framed thereunder. However, if a financially distressed enterprise such as a small company, or a startup as defined by law seeks insolvency resolution, they do not have to go through the timeframe of 180 days rather they may opt for a much faster route that takes just 90 days.

The Code introduced the Fast Track Corporate Insolvency Resolution Process (Fast Track CIRP) to address specific needs and streamline the insolvency resolution process of small-scale companies. The main objective is to expedite the process and complete the insolvency proceedings of a company in a more efficient manner, with a reduced time frame as compared to the standard corporate insolvency resolution process.

Governing law for the Fast Track Corporate Insolvency Resolution Process

Fast Track CIRP in India is governed by the following legal frameworks:

  • Chapter IV of Part II of Code – Section 55 to 58 of the Code
    Note: Section 58 provides that Chapter II of Part II of the Code, i.e., corporate insolvency resolution process, shall apply to fast track CIRP.
  • The Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (Fast Track Regulations)

Corporate Debtors eligible for the Fast Track Corporate Insolvency Resolution Process

As per Section 55 of the Code, an application for Fast Track Corporate Insolvency Resolution Process can be made in respect of a corporate debtor of the following criteria:

  1. With income or assets below a specified threshold as may be notified by the central government
  2. Having a notified class of creditors or amount of debt
  3. Such other category of corporate persons as may be notified by the central government

Note:

Vide Ministry of Corporate Affairs No. S.O. 1911(E) dated July 14, 2017, the central government notified that the following corporate debtors can file an application for fast track corporate insolvency resolution process:

1. Small companies

As per Section 2(85) of Companies Act, 2013, Small Company is defined as under:

  • Other than public company
  • Paid up share capital not more than INR 4 crore (or a higher amount as prescribed, not exceeding INR 10 crore)
  • Turnover not more than INR 40 crore (or a higher amount as prescribed, not exceeding INR 100 crore)
  • The abovementioned criteria shall not apply to:
    • a holding company or a subsidiary company
    • a company registered under Section 8
    • a company or body corporate governed by any Special Act

2. Startups are eligible for Fast Track Corporate Insolvency Resolution Process as well, if they fall within the definition of startup as per government notification issued by the Ministry of Commerce and Industry No. G.S.R. 501(E), dated May 23, 2017.

An entity shall be considered as a startup if it meets the following criteria:

  • If it is a private limited company (as defined in the Companies Act, 2013) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
  • Only seven years have passed since its incorporation/registration, or 10 years for biotech companies.
  • Turnover since incorporation/registration has never exceeded INR 25 crore.
  • Works towards innovation, development or improvement of products or processes or services.
  • If it is working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.

It may be noted that entity formed by splitting up or reconstruction of a business already in existence and partnership firms shall not be considered a startup.

3. An unlisted company with total assets, as per the financial statement of the immediately preceding financial year, not exceeding INR 1 crore.

Steps in Fast Track Corporate Insolvency Resolution Process

Initiation: Section 57 of the Code dictates that creditor, or the debtor itself may initiate the process upon submitting an application before the NCLT with proof of existence of default, either with an information utility or such other proofs as notified by IBBI.

Appointment of IRP: The NCLT must appoint the IRP as per the Chapter II of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Public Announcement must happen within 3 days of IRP being appointed. The announcement has to be published in two newspapers: one in English and another in a regional language. Moreover, the announcement has to be posted on the website, if any, of the corporate debtor.

Submission of Claims: The public announcement shall mandate the last date for submission of claims by the applicant which cannot exceed 10 days from the appointment of the interim resolution professional. The IRP shall verify claims within seven days from the last date of the receipt of claims and maintain a list of creditors.

Committee of Creditors: The IRP is required to file a report certifying the constitution of the committee before the Adjudicating Authority within 21 days of the appointment of the IRP. The IRP must file a report under Regulation 17(1) of Fast Track Regulations certifying the constitution of the committee. Along with this report, IRP may apply to the Adjudicating Authority to convert the process to a non-fast track CIRP if IRP is of the opinion that the company does not qualify for a fast-track process. This opinion is based on the records of the company and the claims received. The first meeting of the committee must take place within seven days after the IRP submits the preliminary report. The IRP shall verify claims within seven days from the last date of the receipt of claims and maintain a list of creditors.

Meetings of the committee of creditors: Meetings of the Committee of Creditors (CoC) in a Fast Track Corporate Insolvency Resolution Process shall be in accordance with Chapters VI and VII of the Fast Regulations. However, the CoC may agree to shorter notice periods to facilitate the process.

Appointment of Registered Valuer: The registered valuer must be appointed within 7 days from appointment of the IRP. There is only one Valuer in fast track CIRP as compared to two in non-fast track CIRP.

Due Diligence by RP: The RP shall submit all resolution plans that comply with the provisions of the Code and regulations framed thereunder to the CoC along with his opinion with respect to preferential transactions (Section 43 of Code), undervalued transactions (Section 45 of Code), extortionate credit transactions (Section 50 of Code), and fraudulent transactions. Additionally, copies of orders issued by the adjudicating authority regarding the aforesaid transactions must also be submitted along with the plan, in accordance with Regulation 38(2) of the Fast Track Regulations.

Information Memorandum (IM) and Invitation for Resolution Plan: The resolution professional shall submit information memorandum in electronic form to all the members of CoC within two weeks of his appointment as RP. The IRP/RP should also publish the invitation for resolution plan. There is no stage of inviting Expression of Interest from the prospective resolution applicants preceding the Request for Resolution Plan (RFRP) unlike the standard CIRP.

Resolution Plans: The RP must provide at least 15 days from the publication of Form G to submit the resolution plan. Resolution Plan shall be as per Regulation 36 and 37 of the IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Extension of timelines: As per Section 56 of the Code, the timeline for completion of Fast Track CIRP is 90 days as compared to 180 days in a standard corporate insolvency resolution process. Further, the fast-track CIRP period can be extended once for an additional period of 45 days. The RP shall file an application before the Adjudicating Authority seeking extension of the period of fast track CIRP subject to the approval of the Committee of Creditors with a majority vote of 75%. If the Adjudicating Authority is satisfied that the process cannot be completed within 90 days, it may issue an order granting an extension of the Fast Track CIRP period.

Conclusion

The Fast Track Corporate Insolvency Resolution Process under the Code is a significant development towards streamlining the insolvency resolution process for specific entities such as small companies and startups in India. The accelerated process not only expedites the resolution but also minimizes the financial strain on startups, allowing them to address their challenges more effectively. Also, a smoother transition through insolvency is encouraged, ultimately supporting the stability and sustainability of the startup ecosystem.

Why Choose InCorp Global?

Our team of experts comes with specialized knowledge and extensive experience in the Insolvency and Bankruptcy Code, 2016. We have a track record of successfully managing insolvency cases and offering strategic advice, demonstrating our capability to manage diverse and complex scenarios. We provide customized solutions that are tailored to the specific needs of each client, ensuring that our strategies align with your unique circumstances and objectives. To learn more about our services, you can write to us at info@incorpadvisory.in or reach out to us at (+91) 77380 66622.

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