Section 8 & 9 - Corporate Insolvency Resolution Process (CIRP) under IBC, 2016

 

Section 8 of the Insolvency and Bankruptcy Code, 2016 deals with the process to be followed by an Operational Creditor before initiating Corporate Insolvency Resolution Process (CIRP) against a corporate debtor. This section mandates that an operational creditor must first deliver a demand notice or invoice demanding payment to the corporate debtor before filing an application to NCLT.

An operational creditor (e.g., supplier or service provider) can issue a demand notice to the company if they owe money and have defaulted.

Requirements:

Before filing an application under Section 9, an operational creditor must:

1. Deliver a Demand Notice of unpaid operational debt or copy of invoice demanding payment to the corporate debtor. The notice must clearly state the details of operational debt and the amount in default.
2. The notice can be sent by:

a) Hand delivery, registered post, or speed post at the registered office of the corporate debtor, or

b)  Electronic mail (email)

This notice must comply with the format prescribed under the Code, including clear identification of the debt and outstanding amount. The operational creditor must also ensure that the corporate debtor has not paid the amount or raised a valid dispute within 10 days of receiving the notice.

Procedure:

The operational creditor initiates the process by issuing a formal demand notice or invoice to the corporate debtor specifying the outstanding amount payable. This notice must be served in the manner prescribed by law and should include details such as the amount due, invoice date, and nature of the debt. Once served, the operational creditor must wait for a period of ten days, during which the corporate debtor can either pay the amount or respond by raising a legitimate dispute supported by documents. If the corporate debtor fails to make payment or raise a valid dispute within this time frame, the operational creditor is entitled to move to the next step of filing an application under Section 9 to initiate insolvency proceedings.

Time Limit:

If no payment or dispute, proceed to file an application under Section 9.

Section 7- Corporate Insolvency Resolution Process (CIRP) under IBC, 2016

Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) empowers a Financial Creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor in case of default. The objective of this provision is to provide a time-bound mechanism for the resolution of insolvency to maximize value and ensure financial discipline among debtors. A financial creditor (e.g., a bank or lender) can request the National Company Law Tribunal (NCLT) to start the insolvency process if the company owes them money and has defaulted on repayment.

As per Section 5(7) of the IBC, a financial creditor is any person to whom a financial debt is owed and includes an assignee or transferee of such debt.

Requirements:

Existence of Default: There must be a default by the Corporate Debtor in repayment of a financial debt.

Minimum Threshold:

• The default amount should be at least ₹1 crore (as per the current notification under Section 4 of IBC).
• For real estate allottees (homebuyers), at least 100 allottees or 10% of total allottees, whichever is less, must jointly apply.

The financial creditor must furnish records from an Information Utility (IU) or other documentary evidence of default.

In addition, the financial creditor is required to nominate an Interim Resolution Professional (IRP) to oversee the affairs of the corporate debtor during the insolvency proceedings. The proposed IRP must submit a written consent to act in the role, along with a declaration confirming the absence of any conflict of interest. All these documents must be duly compiled and attached to the application submitted to the NCLT to meet the statutory requirements for its admission.

Procedure:

1.     Filing of Application with NCLT

The Financial Creditor files an application in Form 1 before the Adjudicating Authority (NCLT) along with the prescribed fee and documents.

2.     Service of Copy to Corporate Debtor & IBBI

A copy of the application is served to the Corporate Debtor and the Insolvency and Bankruptcy Board of India (IBBI).

3.     Admission or Rejection by NCLT

The NCLT may determine the existence of a default within 14 days of receiving the application. If the Tribunal is satisfied that a default has occurred and the application is complete in all respects, it shall admit the application and commence the CIRP. If any deficiencies are found, the applicant is allowed 7 days to rectify them.

4.     Commencement of CIRP

The CIRP commences from the date the NCLT admits the application. A moratorium under Section 14 is imposed, restricting legal proceedings, recovery actions, and enforcement of security interests. A public announcement is then made inviting claims from creditors, and the Interim Resolution Professional (IRP) assumes control of the Corporate Debtor’s management.

Time Limit:

The NCLT may form its view on the application within 14 days from the date of its receipt.

Once the application is admitted and CIRP begins, the entire resolution process is to be completed within a period of 180 days. This timeline can be extended by a further period of up to 90 days, but only once, and only if the Committee of Creditors (CoC) approves the extension with the prescribed majority and NCLT grants such extension.

Thus, the maximum statutory time limit for completion of CIRP is within 330 days, including time taken for litigation process. The objective of this fixed timeline is to ensure speedy resolution and avoid prolonged insolvency situations.

Voluntary Liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016

 

Voluntary liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016 read with Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 allows a solvent company to close its operations on its own. This means the company is not in financial distress and is able to pay off all its dues. It is a formal process that a company chooses to follow when it decides to shut down business activities permanently, usually due to internal business decisions or the end of its purpose.

Requirements

To initiate voluntary liquidation under this section, a company must meet the following key conditions:

1.   The company must not be in financial default. It should be in a position to pay all its debts from its existing assets.

2.  A majority of directors must formally declare that the company is solvent. They must confirm they have reviewed the company's financial position and believe that the company can pay off its debts fully and is not closing to deceive or harm anyone.

3.  The declaration of solvency by the directors must be supported by documents including recent audited financial statements, a report from a registered valuer on the company’s assets (if any), and disclosures of any legal or regulatory matters still pending.

 

4.  A special resolution must be passed by the shareholders in a general meeting approving the voluntary liquidation and appointing a liquidator to carry out the process.

5.  If the company owes any money to any creditor, the approval of creditors representing at least two-thirds of the total debt value is also required.

Procedure

Once the requirements are met, the following steps are followed:

1. The directors make a formal declaration of solvency with supporting documents in a duly held Board Meeting of the Company.

2.  The shareholders approve the decision through a special resolution and appoint a professional liquidator in the General Meeting, within 04 weeks of the Declaration by Directors.

 

3.   If the company has creditors, their approval must also be obtained within 07 days after the shareholders’ resolution.

 

4.  The decision to liquidate is then reported to the Registrar of Companies and the Insolvency and Bankruptcy Board of India, within 05 and 07 days respectively.

 

5.    A public advertisement is issued within 05 days inviting any claims from the stakeholders of the company within 30 days. The liquidator receives and verifies these claims and prepares a preliminary report within 45 days followed by a list of stakeholders of the company within 75 days from the liquidation commencement date.

 

6.   The liquidator then proceeds to sell the company’s assets (if any), settle debts, and distribute any remaining funds to the shareholders.

 

7.   Once everything is completed, the liquidator prepares a final report and submits it to the relevant authorities including the National Company Law Tribunal, along with the dissolution application.

 

8.  After reviewing the submitted dissolution application, the tribunal passes an order formally dissolving the company.

 

9.  A copy of the dissolution order is sent to the Registrar of Companies, and the liquidator is responsible for maintaining the records for a fixed period after closure.

Time Limit

The voluntary liquidation process as per the regulations is stipulated to be completed within a defined period. If the company has creditors involved, the process should ideally be completed within 270 days from the date of approval. If there are no creditors, it must be completed in about 90 days.

Strike-Off under Section 248 of the Companies Act, 2013

Strike-off is a simplified process under the Companies Act, 2013, through which a company that is no longer active can apply to have its name removed from the official register of companies. This method is typically used when a company has stopped operating and wishes to close without undergoing a full liquidation process.

A company may be struck off in the following cases:

a) a company has failed to commence its business within one year of its incorporation 

b) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company

c) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company 

d) the company is not carrying on any business or operations, as revealed after the physical verification carried out.

Modes of Strike Off-

A.  Voluntary Strike Off (by Company) – Section 248(2)

Applicable when the company:   

• has not commenced its business within one year of incorporation; or
• is not carrying on any business or operation for the last two financial years and has not applied for the status of a dormant company.

The company files Form STK-2 with the RoC along with:

• Indemnity bond (STK-3)
• Statement of accounts (not older than 30 days)
• Special resolution/consent of 75% members in terms of paid-up share capital
• Affidavit from directors (STK-4)

B.    Compulsory Strike Off (by RoC) – Section 248(1)

The RoC may remove a company’s name if it has reasonable cause to believe that:

• The company has failed to commence its business within one year of incorporation; or
• The company is not carrying on any business or operation for the preceding two financial years and has not applied for the status of a dormant company; or
• The subscribers to the memorandum have not paid the subscription money and a declaration has not been filed within 180 days; or
• The company is not carrying on any business as per the information received.

RoC sends notice to the company and its directors in Form STK-1.

Once the company is struck off, it is no longer considered a legal entity.

 

Procedure

The general steps for strike-off are as follows:

1. Board Meeting: The board of directors approves the proposal by passing of a resolution in the Board Meeting for strike off.

2. Settlement of Liabilities: All the liabilities are cleared off and settled including any loans or statutory dues. All the bank accounts of the company are closed, and NOC is obtained from Creditors for their approval.

3. Shareholder Consent: A resolution is passed by shareholders with atleast 75% members approving the resolution (in terms of their share capital) confirming their agreement to apply for strike-off.

4. Filing the Application: The company submits an application to the Registrar of Companies in Form STK-2 (Govt Fees for STK-2 is ₹ 10,000), along with supporting documents such as:

·    A copy of the board and shareholder resolutions 

·   A statement of accounts (not older than 30 days and certified by a Chartered Accountant)

·   Affidavits (in STK-4) and indemnity bonds from all directors (in STK-3)

·    Confirmation of no legal disputes or pending obligations

5. Public Notice by RoC: RoC issues a public notice in Form STK-6, allowing objections from the public, creditors, or stakeholders (timeframe: 30 days).
   
   
6. Final Notice & Strike Off: After 30 days, if no objection is received, the RoC strikes off the name and publishes the notice in the Official Gazette in Form STK-7.
    

Revival of the company after Strike Off: Once the name of the company is struck off under Section 248, and the notice is published in the Official Gazette, the company stands dissolved and ceases to exist as a legal entity. However, under Section 252 of the Companies Act, 2013, if the Registrar is satisfied that the name of the company has been struck off based on incorrect information, he may file an application before the tribunal within a period of three years from the date of passing of order dissolving the company, seeking restoration.  

Further if the company, any member, creditor, or aggrieved person may apply to the National Company Law Tribunal (NCLT) for restoration of the company’s name within twenty years from the date of publication in the Official Gazette of the Notice. If the Tribunal is satisfied that the removal was unjustified, it may order the restoration of the company’s name to the register, and the company shall be deemed to have continued as if its name had never been struck off.

"EXIT STRATEGIES FOR MULTINATIONAL COMPANIES IN INDIA: A COMPARATIVE LEGAL ANALYSIS OF CLOSURE MECHANISMS UNDER THE IBC AND COMPANIES ACT"

India’s corporate landscape includes a significant number of Multinational Companies (MNCs) operating through wholly owned subsidiaries, joint ventures, or branch/liaison offices. These entities may at some stage consider closure or exit from the Indian market due to strategic realignment, financial distress, regulatory challenges, or other commercial considerations.

Exit strategies for MNCs in India involve a range of legal, financial, and operational considerations to ensure a smooth and compliant withdrawal from the market. The primary objective is to present a comprehensive and comparative analysis of the legal framework governing the closure of Multinational Companies (MNCs) operating in India, based on their solvency status. In the dynamic and evolving landscape of global business, MNCs often reassess their market presence and may choose to exit jurisdictions for strategic, financial, or operational reasons. In such instances, understanding the legal options and procedural requirements for closure becomes critical.

There are two principal legislative frameworks governing corporate exit in India- Insolvency and Bankruptcy Code, 2016 (IBC), and the Companies Act, 2013. Their primary focus is to delineate the exit mechanisms available to multinational corporations, both in situations of solvency and insolvency, through a critical analysis of the key legal processes prescribed under these statutes.

Through a detailed examination of these legal pathways, it is aimed to provide clarity on the conditions, procedural timelines, regulatory authorities involved (such as the National Company Law Tribunal (NCLT), Registrar of Companies (ROC), and Insolvency and Bankruptcy Board of India (IBBI)), and compliance requirements relevant to each mode of closure.

By bridging the legal and procedural understanding of company closure mechanisms, this study aims to contribute to better strategic decision-making for MNCs contemplating an exit from the Indian market, while also offering policy insights that may inform future legislative reforms.

Classification of Companies Based on Solvency

Legal procedures vary based on the financial position of the company:

a) Solvent Companies

Entities that can pay off their debts as they fall due. Closure mechanisms include:

●     Strike-off under Section 248 of the Companies Act, 2013

●     Voluntary Liquidation under Section 59 of the IBC, 2016

●     Winding Up of Companies under Section 271 of the Companies Act

b) Insolvent Companies

Entities unable to pay debts. Closure is initiated through:

● Corporate Insolvency Resolution Process (CIRP), followed by liquidation under IBC followed by liquidation

●     Winding Up of Companies- Section 271 of the Companies Act