Title: "Initiating Insolvency Proceedings: Exploring Section 10 of the Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code (IBC) was enacted to streamline insolvency proceedings and facilitate prompt and effective resolution of insolvency matters, involving pertinent stakeholders, including creditors. Section 7 allows financial creditors and Section 9 permits operational creditors to initiate Corporate Insolvency Resolution Process (CIRP) against a corporate debtor. Notably, a company can also voluntarily instigate insolvency proceedings by approaching the National Company Law Tribunal (NCLT) under Section 10 of the IBC. Additionally, the IBC empowers the NCLT to initiate liquidation in cases where debt restructuring is unviable and the company's liabilities are insurmountable. This analysis scrutinizes the circumstances under which a corporate debtor can employ Section 10 of IBC and whether it represents a favorable course of action for a corporate debtor burdened with substantial debt and liabilities, as opposed to liquidation under IBC.

I. The Legal Provision: Section 10 of IBC Section 10 of the IBC stipulates that the insolvency resolution process can be set in motion by a 'corporate applicant'. The definition of 'corporate applicant' as per Section 5(5) of IBC encompasses the corporate debtor (i.e., a corporate entity or a company with outstanding debts), a member or partner of the company, or any individual responsible for managing the operations and resources of the company or exercising control over its financial affairs. Thus, Section 10, read in conjunction with Section 5(5) of the IBC, facilitates the initiation of the insolvency resolution process by the defaulting company itself.

The principal intent behind introducing Section 10 of IBC is to afford the corporate debtor the option to initiate CIRP in cases of prolonged default, effectively acknowledging its insolvency. While this provision bears some resemblance and analogy to the provisions and jurisprudence of voluntary winding up, it builds upon the creditor-controlled framework of insolvency resolution mandated by the IBC.

II. Advantages of Self-Initiation of Insolvency

1. Timely Initiative: By proactively approaching the NCLT, the company ensures that it commences the resolution process before matters deteriorate further. Accumulating debts and escalating interest costs, coupled with a lack of working capital, can lead to rapid deterioration of the business's salvage value. Timely filing under Section 10 could serve as a lifeline for the business and stakeholders, minimizing the financial losses they may incur.
2. Protection from Creditors and Legal Proceedings: Upon admission of the application under Section 10 of IBC, the Adjudicating Authority initiates CIRP, imposing a moratorium under Section 14 of IBC. During this period, all legal proceedings, suits, and recovery actions initiated by creditors against the corporate debtor are temporarily suspended to maintain the status quo of the corporate debtor's business. Moreover, Section 14(2) of IBC mandates the uninterrupted supply of essential goods or services to the corporate debtor, as outlined in Regulation 32 of the Insolvency Resolution Process for Corporate Persons Regulations, 2016.
3. Control over the Appointment of IRP/RP: When a company opts for insolvency under Section 10 of IBC, it has the prerogative to propose the appointment of an Insolvency Resolution Professional (IRP) as per Section 10(3)(b) of IBC. This proposal is submitted concurrently with the application. Once appointed, the IRP is vested with the responsibility of overseeing the management of the corporate debtor's assets, ensuring its continued operation to maintain asset value. The IRP also possesses the authority to engage an accountant, legal representative, and enter into contracts on behalf of the corporate debtor.

It is imperative to note that this provision is subject to potential amendment, as per the draft amendments proposed by the Ministry of Corporate Affairs in January 2023, wherein the right of the corporate debtor to propose the IRP/RP may be revoked.

1. Possibility of Settlement: The Supreme Court, in the case of Utara Foods and Feeds (P) Ltd. v. Mona Pharmachem (2018) 15 SCC 587, exercised its authority under Article 142 of the Constitution to overturn the NCLAT order invalidating the settlement between creditors and the corporate debtor. This ruling opened up a new avenue for amicable settlements between corporate debtors and creditors. Subsequently, on 06.06.2018, Section 12A was introduced in the IBC, allowing for the withdrawal of an insolvency application under Section 10, provided it is initiated by the corporate debtor and endorsed by at least 90% of the Committee of Creditors (CoC). Hence, the possibility of a settlement is not precluded upon the filing of the Section 10 application, affording the necessary flexibility for the corporate debtor to persevere in its efforts to rectify the situation.
2. Comparative Advantage over Alternatives: A company or business facing default in its debts and significant outstanding liabilities typically confronts limited recourse options. These may involve engaging creditors (e.g., banks) for a one-time settlement or debt restructuring, or seeking fresh equity infusion from new investors who perceive potential value creation in the future, among other scenario-specific options. Naturally, should these avenues prove futile, the corporate debtor should promptly approach the NCLT under Section 10. However, even prior to that, if the promoters and decision-makers of the corporate debtor are amenable to a change in ownership, and if creditors discern that their debt would be more effectively repaid, albeit partially, corporate insolvency resolution can confer far superior advantages compared to these alternatives.

III. Two Major Issues: Change in Ownership and PUFE Change of Ownership

It is an inexorable consequence of the insolvency resolution process that the promoters or erstwhile owners of the company/business must relinquish ownership. The IBC, in accordance with established corporate philosophy, treats the company as a distinct entity and endeavors to extract maximum value from it, as perceived by those intervening to rescue it. The underlying rationale is to identify an entity (i.e., the resolution applicant) that harbors a belief in generating greater value and returns from the company and its business than the present promoters or management can achieve. Naturally, the upshot is a transfer of ownership and management of the company.

Given the sentimental attachment often associated with the business and the assets of the company, parting with them can prove arduous. On numerous occasions, allegations are raised before the NCLT and Courts asserting that the provisions of Section 10 have been manipulated by the promoters themselves, directly or indirectly, through controlled entities, in an attempt to present themselves as resolution applicants. Such situations must be scrupulously avoided, as they not only disrupt Section 10 proceedings, but also expose the promoters and the corporate debtor to the risk of additional legal proceedings.

PUFE Transactions

The IBC incorporates remedial provisions to address preferential (Section 43), undervalued (Section 45), fraudulent (Section 66), and extortionate (Section 50) transactions, collectively referred to as PUFE transactions. These provisions have been incorporated into the law to prevent defaulting and distressed companies from engaging in transactions detrimental to the interests of creditors. When a resolution application is admitted and the IRP assumes control over the company's operations, it is incumbent upon the IRP to scrutinize all recent transactions and form an opinion as to whether any PUFE transactions have been undertaken.

There may be scenarios where transactions were executed without any malevolent intent, yet

Advocate Pallavi Srivastava 美国亚利桑那州立大学 英国牛津大学 Lawyers of India IBC Laws editor IBC @in