NCLT and Insolvency Matters in India: Legal Process, Corporate Disputes and Remedies

Introduction

Corporate conflicts and economic crisis pose serious hurdles for businesses, stockholders, lenders and executives. The NCLT (National Company Law Tribunal) was formed under the Companies Act of 2013 and began its work on June 1, 2016. It handles matters of corporate insolvency and company law issues. Its jurisdiction includes insolvency resolution process (CIRP), oppression and mismanagement, mergers, deregistration and other corporate events, making it essential to consult professionals.

What is NCLT?

The National Company Law Tribunal is the specialised quasi-judicial body established as per Section 408 of Companies Act of 2013. It provides a specialised forum for matters relating to:

• Company law disputes;

• Corporate insolvency;

• Mergers and amalgamations;

• Oppression and mismanagement;

• Shareholder and membership-related disputes;

• Reduction of share capital;

• Restoration of company names;

• Winding-up proceedings; and

• Insolvency proceedings involving corporate persons.

NCLT has the authority to manage insolvency resolution cases involving personal guarantors to corporate debtors as per various sections of IBC. The tribunal conducts its functions from different benches that operate throughout India as per the territorial jurisdiction assigned to such benches.

Jurisdiction of NCLT in corporate and insolvency matters

NCLT jurisdiction is not unlimited. The tribunal can exercise the jurisdiction only where Companies Act, IBC or any another applicable law confers such jurisdiction. Under Companies Act, the NCLT may deal with the matters such as:

• Oppression and mismanagement;

• Class action proceedings;

• Compromise and arrangements;

• Mergers and amalgamations;

• Reduction of share capital;

• Rectification of the register of members;

• Restoration of a company's name; and

• Winding-up proceedings.

Under the IBC, NCLT functions as the Adjudicating Authority for corporate insolvency proceedings and related applications.

However, merely because a company is undergoing insolvency does not mean that every dispute involving that company automatically comes within the jurisdiction of NCLT. Courts have repeatedly emphasised that disputes unrelated to insolvency may need to be pursued before the forum otherwise competent to decide them.

Therefore, identifying the nature and source of the dispute is an important first step before filing a case.

What is the corporate insolvency resolution process?

The Corporate Insolvency Resolution Process, known as the CIRP, is the statutory process under IBC for resolving the insolvency of the eligible corporate debtors.

The objective is mainly to facilitate the resolution of the financial distress while attempting to preserve the value of corporate debtors and balance interests of the stakeholders.

The IBC provides separate provisions for initiation of CIRP by financial creditors, operational creditors and the corporate applicant. Sections 7, 9 and 10 respectively provide the statutory routes for these applications. The process may ultimately result in:

• Approval of a resolution plan;

• Withdrawal in circumstances permitted by law; or

• Liquidation where resolution is unsuccessful or otherwise ordered under the Code.

The IBC framework also provides for moratorium, appointment of insolvency professionals, constitution of the Committee of Creditors, verification of claims and other procedural steps.

Who can initiate insolvency proceedings before NCLT?

CIRP may generally be initiated through the following routes:

Financial Creditor A financial creditor may approach NCLT under Section 7 of the IBC when the statutory requirements relating to default and filing are satisfied. Financial creditors commonly include banks, financial institutions and other persons whose claims qualify as financial debt under the IBC.

Operational Creditor An operational creditor may initiate proceedings under Section 9 after following the statutory procedure, including service of the required demand notice and satisfying the applicable conditions. Operational creditors may include suppliers, service providers and other eligible claimants.

Corporate Applicant A corporate debtor may itself initiate insolvency proceedings under Section 10, subject to the requirements of the IBC. Before filing, the parties should carefully examine the existence of debt, default, supporting documents and applicable statutory requirements.

Major stages of NCLT insolvency proceedings

The insolvency process generally involves several important stages.

1. Filing of Application The eligible financial creditor, operational creditor or corporate applicant files the appropriate application before the jurisdictional NCLT. The application must be supported by relevant documents and information prescribed under the applicable law and regulations.

2. Admission or Rejection NCLT examines whether the statutory requirements have been satisfied. If the application is admitted, the CIRP formally commences.

3. Declaration of Moratorium Upon commencement of CIRP, the NCLT declares a moratorium in accordance with Section 14 of the IBC.

4. Appointment of Insolvency Professional An Interim Resolution Professional (IRP) is appointed in accordance with the statutory framework. The management of the corporate debtor's affairs is affected in accordance with the IBC framework.

5. Public Announcement and Claims A public announcement is made and creditors are invited to submit their claims. The insolvency professional examines and verifies claims in accordance with the applicable regulations.

6. Committee of Creditors The Committee of Creditors (CoC) is constituted as prescribed by the IBC. The CoC plays a central role in evaluating and considering resolution proposals.

7. Resolution Plan Potential resolution applicants may submit plans in accordance with the IBC and applicable regulations. A compliant plan may be considered by the CoC and subsequently placed before NCLT for approval.

8. Approval or Liquidation If the statutory requirements for approval of a resolution plan are fulfilled, NCLT may approve it. Where resolution fails or liquidation becomes applicable under the Code, the company may proceed towards liquidation. The IBC contains specific provisions dealing with liquidation and distribution of assets.

Role of the resolution professional and committee of creditors

The Resolution Professional plays an important role in administering the CIRP. The responsibilities may include:

• Taking control and custody of relevant assets;

• Collecting and verifying claims;

• Maintaining the corporate debtor as a going concern;

• Managing the affairs of the corporate debtor as required under the IBC;

• Providing information to prospective resolution applicants; and

• Assisting the CoC and NCLT in the insolvency process.

The Committee of Creditors, primarily comprising financial creditors as provided by the Code, evaluates resolution proposals and takes decisions within its statutory powers.

The process is intended to balance competing interests while attempting to maximise the value of the corporate debtor's assets.

Moratorium during insolvency proceedings

The moratorium is one of the most significant protections associated with commencement of CIRP. Section 14 of the IBC provides for a moratorium subject to the statutory conditions and exceptions.

The purpose is broadly to provide a period of legal protection during which the insolvency process can proceed without individual recovery actions undermining the resolution process.

However, the scope of the moratorium should not be misunderstood. It does not automatically prevent every type of proceeding against or involving a corporate debtor. The precise applicability depends upon the nature of the proceeding, the relief claimed and the relevant statutory provisions and judicial interpretation.

Therefore, creditors and corporate debtors should obtain specific legal advice before assuming that a particular proceeding is either completely barred or automatically permitted.

Corporate disputes heard by NCLT

NCLT is not limited to insolvency cases. Important corporate disputes and matters may include:

1. Oppression and Mismanagement Members may seek remedies where the affairs of a company are conducted in a manner that is oppressive or prejudicial to members or otherwise falls within the statutory requirements.

2. Shareholder Disputes Certain disputes involving membership rights, company records and corporate governance may come before NCLT where the Companies Act provides jurisdiction.

3. Mergers and Amalgamations NCLT has a role in approving statutory schemes of compromise, arrangement, mergers and amalgamations where the Companies Act requires tribunal approval.

4. Reduction of Share Capital Applications concerning reduction of share capital may also fall within the jurisdiction of NCLT subject to statutory requirements.

5. Restoration of Company Name Where the name of a company has been removed from the register, eligible applicants may seek restoration through the statutory mechanism before NCLT.

6. Winding Up NCLT also deals with winding-up matters under the Companies Act in circumstances prescribed by law.

Remedies available before NCLT

Depending upon the nature of the case, parties may seek various remedies before NCLT, including:

• Admission of a CIRP application;

• Approval of a resolution plan;

• Withdrawal of insolvency proceedings where legally permissible;

• Orders relating to oppression and mismanagement;

• Directions concerning corporate governance and management;

• Approval of mergers or arrangements;

• Restoration of a company's name;

• Winding-up orders; and

• Other statutory reliefs available under the Companies Act or IBC.

The appropriate remedy depends upon the facts, documents, statutory provision and jurisdiction of the tribunal.

A party should therefore avoid filing an NCLT petition merely because the dispute involves a company. The legal foundation of the claim must first be established.

Appeal against NCLT orders

The order passed by the NCLT is not necessarily the final stage of litigation.

The National Company Law Appellate Tribunal (NCLAT) functions as appellate forum for the specified NCLT orders as per Companies Act and IBC. Further challenge may, where permitted by law, lie before the Supreme Court on questions of law.

Appeal periods under the IBC can be strict. A party intending to challenge an NCLT order should therefore obtain the order, examine the applicable limitation period and promptly determine whether an appeal is maintainable.

Delay in taking legal action can materially affect available remedies.

When can a company face liquidation?

Liquidation is a completely different result from a successful resolution of a business.

If the insolvency resolution process fails to produce a resolution plan or if the situation warrants liquidation according to the IBC, NCLT would order liquidation.

The liquidator carries out his statutory duties, including taking control of the liquidation estate, obtaining assets, establishing claims and paying out the proceeds according to the law.

Section 53 of the IBC defines the order in which the proceeds from liquidation will be distributed.

This is why it is important for creditors, company directors, employees and owners to be aware of the consequences of liquidation before making the right decision.

Practical steps before filing an NCLT case

Before initiating the proceedings, the parties should carefully consider the following:

• Identify the exact nature of the corporate dispute.

• Determine whether NCLT has jurisdiction over the matter.

• Verify the existence of debt and default in insolvency matters.

• Collect the agreements, invoices, financial statements as well as the correspondence.

• Preserve the board resolutions and corporate records.

• Check limitation periods and procedural requirements.

• Determine whether any statutory notice is required.

• Examine whether the settlement or mediation is commercially preferable or not.

• Prepare petition and the supporting documents accurately.

• Obtain professional advice before filing.

• Monitor every hearing and procedural direction after filing.

How Lead India can help you?

1. Provide legal guidance regarding NCLT, NCLAT and insolvency proceedings.

2. Assist companies and creditors in understanding their legal rights and available remedies.

3. Help evaluate whether a matter falls within NCLT jurisdiction.

4. Assist in preparing and filing appropriate corporate or insolvency applications.

5. Provide support in disputes involving shareholders, directors, creditors and corporate management.

6. Assist with documentation relating to CIRP, claims and resolution proceedings.

7. Help challenge or defend appropriate NCLT orders before the appellate forum.

8. Provide for legal assistance in matters involving the corporate restructuring, winding up and the insolvency.

9. Help the clients to understand settlement and the alternative dispute-resolution possibilities before pursuing the lengthy litigation.

Conclusion

The NCLT has an integral part in resolving company disputes and matters concerning insolvency as per the provisions of Companies Act and IBC. The process that has to be adopted by NCLT is a technical one involving specific timelines and documentation. To be efficient in availing of justice it is vital to know about proper jurisdiction, available remedies and commercial implications of the litigation.

One can talk to lawyer from Lead India for any kind of legal support. In India, free legal advice online can be obtained at Lead India. Along with receiving free legal advice online, one can also ask questions to the experts online free through Lead India.