Insolvency Service!
Legal Framework for Resolving Insolvency
We provide legal solutions for businesses facing insolvency, a situation where a company is unable to meet its financial obligations. Insolvency can occur due to various reasons, including an increase in competition, disruption in the supply chain, inefficient management, and low sales revenue, among others.
Types of Insolvency
- cash flow insolvency
- balance sheet insolvency
To Resolve Insolvency
businesses should relook at their business model and determine if it can generate the average EBIDTA of their industry. Other approaches include securing fresh loans or restructuring existing ones, selling the owner’s stake, or selling fixed assets to infuse funds into the business.
There is a legal framework for reorganizing a business under the Insolvency and Bankruptcy Code, 2016 (IBC) or Sections 230-232 of the Companies Act, 2013. Stakeholders like lenders, private financiers, or operational creditors can invoke the provisions of IBC if the default is more than Rs. one crore through the Corporate Insolvency Resolution Process (CIRP). For MSME, they can invoke the Pre-Pack process under IBC if the default is Rs. 10 lakhs or more. If the business model is no longer sustainable, even the company can apply under these legal frameworks for winding up or transferring the business and getting rid of various claimants and compliances.
The provisions of IBC can be invoked by filing an application in the National Company Law Tribunal (NCLT). On admission of the application, the court appoints an IRP/RP, who takes de-jure control of the company with the help of the promoter and makes a public announcement inviting claims against the company. The RP appoints a valuer to value the business. The RP then seeks a resolution plan from interested parties for buying the company. The most suitable resolution plan is approved by the Committee of Creditors (COC), which is constituted based on claims received against the company. The plan is placed before the Tribunal (AA) for approval. The whole process is time-bound. If no suitable plan is received by RP/COC, the Tribunal may order for liquidation, and the liquidator sells the assets of the company within a period of one year.
If the promoter of the company feels that the business model is not viable or is unable to infuse equity/debt, or will not survive competition, they can make an application before the tribunal and take orders for reorganization or winding up. In this process, they will be absolved of the liability of lenders and operational creditors. The creditors will be paid as per the terms of the resolution plan given by the interested buyer.
For registered MSMEs
the company/promoter can submit a resolution plan to the RP or induct a relative or a strategic partner in the proposed reorganization. If COC/Tribunal accepts the plan, the promoter may not lose control of the company. The liabilities of financial, operational, or other creditors will be settled as per the approved plan, which will be legally binding on all stakeholders.
Various parties, including the owner of the company, lenders, personal guarantors, and the government, can initiate the insolvency process under different provisions of IBC. Our legal experts can help businesses navigate through the insolvency process and provide customized solutions to meet their specific requirements.
