Fast Track Insolvency Resolution Process for Start-ups

By Ashima Obhan

By Vrinda Patodia

Start-ups have been the new buzz word in the Indian scenario and in recent years, India has emerged as one of the top three countries globally in terms of the number of startups founded.A major concern for start-ups in India though is the low proportion of startups that get funded. According to a FICCI report[1] the growth and the funding of the Indian startups in different sectors occurs later than what is seen for global startups.

While 2015 was a year of big-ticket funding rounds, 2016 is a year that was harsh reality for India’s startup ecosystem: 212 start-ups did not survive to see 2017. And the number was 50% higher than last year, when about 140 startups were shut down[2]. One of the biggest casualties in 2016 was grocery delivery startup PepperTap, which was labelled the biggest competition to BigBasket last year. It topped the list of startups that were closed down even after having raised the highest funding from investors, reinforcing the fact that there is never any clear road to being profitable and this applies to start-ups as well.

Majority of start-ups fail, making investing in start-ups risky for investors. The Department of Industrial Policy and Promotion defines a start-up as an entity, incorporated or registered in India not prior to seven (7) years (however for biotechnology startups not prior to ten (10) years), with an annual turnover not exceeding INR 25 crore in any preceding financial year and an entity working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. An entity formed by splitting up, or reconstruction, of a business already in existence is not considered a start-up and an entity shall cease to be a start-up if its turnover for the previous financial years has exceeded INR 25 crore or it has completed seven (7) years and for biotechnology startups ten (10) years from the date of incorporation/ registration.

In a bid to ease recovery of dues from start-ups and enable faster exit, on June 14, 2107 the Central Government notified the provisions of the ‘Fast Track Insolvency Resolution Process’ under the Insolvency and Bankruptcy Code, 2016 (“Code“) labelled the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (“Regulations“).

The Regulations and the fast track resolution process are applicable to the following categories of corporate debtors-:

(i) a small company as defined under the Companies Act, 2013;

(ii) a Startup (other than the partnership firm) as defined above; or

(iii) an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding rupees one crore.

The fast track resolution process aims to expedite the insolvency resolution process of start-ups and small companies with lesser complexities and cuts down the time taken to complete an insolvency resolution to almost half as compared to the regular process under the Code. The fast track process is required to be completed within a period of ninety (90) days, as against one-eighty (180) days in other cases. However, the adjudicating authority may, extend the period of ninety (90) days by a further period up to forty-five (45) days for completion of the process. This extension however can be granted only once and can be applied for only when the committee of creditors, in a resolution passed and supported by a vote of 75% of the voting share, is of the opinion that the fast track process cannot be completed within the stipulated ninety (90) days.

The fast track process can be initiated by a creditor or the corporate debtor itself by filing an application, along with the proof of existence of default, to the Adjudicating Authority for initiating fast track resolution process. Once the application is admitted, an interim resolution professional is appointed who can determine if the matter qualifies for fast-tracking. The interim resolution professional is required to move an application within twenty-one (21) days to pass an order to convert the fast-track process into a normal corporate insolvency resolution process if he thinks the fast track application is not applicable.

The Regulations provide that financial creditors must submit their proof of claims by electronic means only thereby saving time. However, operational creditors, including workmen and employees may submit their proof of claims in person, by post or through electronic means.In order to save time, the Regulations also provide that a notice for the meeting of the committee of creditors could be served by text or via email. Further, the notice needs to provide an option to the participants to attend the meeting via video conferencing or other audio and visual means. The resolution professional is required to make arrangements to ensure uninterrupted and clear audio and visual connections.

The Regulations as a whole provide for the resolution process from the initiation of the insolvency resolution of the corporate debtors till its conclusion with approval of the resolution plan by the adjudicating authority within the set timelines thereby ensuring a speedy disposal of any application under the fast track process.