Corporate insolvency resolution processes (CIRPs) are critical to maintaining the stability and integrity of a country’s financial and economic system. In India, the Insolvency and Bankruptcy Code (IBC) of 2016 establishes the legal framework that governs CIRPs, streamlining the process to ensure that distressed companies can either be revitalized or liquidated efficiently. This article explores the statutory provisions underpinning the CIRP under the IBC, providing an in-depth understanding of the principles, objectives, and operational structure of corporate insolvency in India.
Objectives and Scope of CIRP under IBC
Objectives of CIRP
The primary objective of the IBC is to protect the interests of all stakeholders by balancing creditor interests with debtor protections. CIRP aims to rehabilitate a distressed corporate debtor through the collective participation of creditors and shareholders, and if rehabilitation is unfeasible, ensure an orderly liquidation. Some key goals include:
Resolving insolvency within stipulated timelines
Maximizing the asset value of the debtor company
Facilitating a transparent and time-bound resolution mechanism to improve creditor recoveries
Promoting entrepreneurship and reducing the burden of financial failures on the economy.
Scope of the IBC
The IBC covers a wide range of entities, including partnerships, limited liability partnerships (LLPs), and companies. Notably, CIRP provisions can be applied by any creditor, whether financial, operational, or corporate debtor itself, under certain defined circumstances. The application triggers the legal process that may lead to resolution or liquidation.
Initiating Corporate Insolvency Resolution Process (CIRP)
Who Can Initiate CIRP? A CIRP can be initiated by financial creditors, operational creditors, or the corporate debtor itself, provided they meet certain thresholds.
Financial Creditors: Financial creditors, such as banks, can initiate CIRP if the default exceeds a specified limit. They represent institutions or individuals that have lent money to the corporate entity.
Operational Creditors: Operational creditors, like suppliers, can also apply if the debtor defaults on operational dues. They need to serve a demand notice to the debtor, followed by a notice period before the application to CIRP.
Corporate Debtor: In cases where the debtor is aware of their financial distress, they may voluntarily submit an application to initiate CIRP to facilitate either a resolution plan or liquidation.
Filing Application with the NCLT The CIRP application must be filed with the National Company Law Tribunal (NCLT), the adjudicating authority for insolvency matters. Once the NCLT accepts the application, the CIRP is considered officially initiated. The tribunal also appoints an interim resolution professional (IRP) who takes over the management of the debtor’s affairs and assets.
Role of the Resolution Professional (RP)
Interim Resolution Professional (IRP) Upon acceptance of the CIRP application, the NCLT appoints an IRP for an initial 30-day period. The IRP takes control of the corporate debtor’s management and forms the Committee of Creditors (CoC), which plays a pivotal role in the process. They also assess and verify claims from creditors to ensure a comprehensive understanding of the company’s financial obligations.
Responsibilities of the Resolution Professional (RP) After the IRP’s appointment, a resolution professional (RP) may be confirmed or replaced by the CoC. The RP administers the CIRP, oversees the debtor’s business operations, and ensures compliance with legal requirements. Key responsibilities include:
Facilitating the creation of a viable resolution plan by inviting proposals from potential resolution applicants.
Preparing an Information Memorandum for prospective investors or buyers.
Managing the CIRP to ensure it adheres to the legal deadlines (usually 180 days, extendable to 330 days in special cases).
Committee of Creditors (CoC) and Its Powers
Formation of CoC The Committee of Creditors (CoC) consists of all financial creditors, and it holds substantial power in deciding the future of the debtor. Operational creditors may attend CoC meetings but generally do not have voting rights.
Decision-Making Process The CoC is responsible for reviewing and approving any resolution plan proposed by interested parties. Decisions within the CoC are typically made based on voting, with a minimum of 66% of the CoC voting in favour of a resolution plan for it to be accepted. The CoC also reserves the right to reject all resolution plans, leading to the liquidation of the debtor’s assets.
Role in Approving Resolution Plan The CoC evaluates each resolution plan on its merits, considering factors such as the potential recovery for creditors, the viability of the business under new management, and compliance with statutory requirements. Approved plans are submitted to the NCLT for final validation.
Moratorium and Asset Protection during CIRP
Declaration of Moratorium Upon the commencement of CIRP, the NCLT declares a moratorium, which temporarily halts all pending or ongoing legal proceedings against the corporate debtor. This provides a legal shield to the debtor, allowing them to focus on the resolution process without the pressure of lawsuits and asset seizures.
Impact of Moratorium on Stakeholders During the moratorium, creditors are barred from recovering their dues independently, ensuring that the resolution process can proceed without interference. The moratorium lifts when the CIRP concludes or if the debtor is liquidated.
Protection of Assets The moratorium also protects the debtor’s assets from depletion, preserving them for potential revival or equitable distribution among creditors in case of liquidation.
Resolution Plans and Approval Process
Preparation and Submission of Resolution Plans The RP invites proposals from resolution applicants, which are potential investors or buyers interested in reviving the corporate debtor. These applicants must submit a detailed plan outlining strategies for debt restructuring, business revival, and payments to creditors.
Evaluation by the CoC The CoC critically evaluates each plan, assessing its feasibility, financial impact, and compliance with statutory requirements. To safeguard against fraudulent or malicious practices, each resolution applicant undergoes a rigorous due diligence process.
Approval by the NCLT After the CoC approves a resolution plan, it must be submitted to the NCLT for final validation. The NCLT examines whether the plan adheres to the IBC’s principles and whether it is in the best interests of creditors and other stakeholders.
Liquidation Process and Distribution of Assets
Triggering Liquidation If no resolution plan is approved within the stipulated timeline, or if the CoC opts to reject all plans, the corporate debtor proceeds to liquidation. In such cases, the NCLT appoints a liquidator to oversee the distribution of assets.
Role of the Liquidator The liquidator manages the sale of the debtor’s assets, aiming to maximize recovery for creditors. They follow a strict priority order for distribution, with secured creditors and employees receiving payments before other unsecured creditors.
Priority of Claims Distribution of proceeds follows the IBC’s priority list, ensuring a fair and orderly process. Secured creditors, workmen’s dues, and government dues are typically prioritized.
Impact and Challenges of CIRP in India
Successes and Milestones Since its enactment, the IBC and CIRP framework have strengthened India’s insolvency regime, leading to improved recovery rates and reduced time frames for resolution. The framework also boosts investor confidence by providing a structured resolution mechanism.
Challenges and Criticisms Despite its achievements, CIRP faces challenges such as delays in NCLT proceedings, limited CoC expertise, and high costs associated with prolonged CIRPs. Legislative amendments and judicial interventions have sought to address these issues, but effective enforcement remains key.
Conclusion
The statutory provisions governing CIRP are foundational to India’s corporate insolvency framework, aimed at creating a fair, transparent, and efficient mechanism for resolving financial distress. By balancing the interests of creditors, debtors, and stakeholders, the IBC plays a vital role in fostering economic stability and accountability. Continuous improvements and strong enforcement will be crucial for realizing the full potential of CIRP in addressing corporate insolvency challenges and strengthening the Indian economy.