Have you ever thought about what happens when a company faces financial distress in India? How does the legal framework address such situations? The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code 2016, (IBC) plays an important role in India’s corporate landscape by offering a structured legal framework for addressing financial challenges and resolving insolvency issues.
Under the IBC, the CIRP provides a time-bound process for resolving insolvency and ensuring equitable distribution of assets and maximising creditor recovery.
The CIRP contributes to the overall stability of the Indian corporate sector, ensuring to preserve economic value, restore financial viability and safeguard the interests of all parties involved.
Understanding the Corporate Insolvency Resolution Process
In India’s ever-changing business environment, managing financial challenges is crucial for survival. Knowing the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) goes beyond legal compliance; it equips businesses to overcome financial difficulties and sustain their contribution to the dynamic Indian economy.
Below is the Corporate Insolvency Resolution Process (CIRF)-
1. Initiation of the Resolution Process
Starting the resolution process involves a legal procedure to fix or close struggling businesses quickly and fairly under the IBC law
Eligibility Criteria [1]
The initiation of the corporate insolvency resolution process under the IBC can be undertaken by specific entities as outlined in code-
- Under section 7 – A Financial Creditor
- Under section 9 – An operational creditor
- Under section 10 – A corporate applicant of a corporate debtor.
#1 Filing Procedure
Financial Creditor
Documents and Evidence: The application must include evidence of the default, which can be a record with the information utility or other evidence. It should also propose the name of the resolution professional to act as an interim resolution professional and may include additional information as specified by the Insolvency and Bankruptcy Board of India (IBBI).
Application: A financial creditor, either individually or jointly with other financial creditors, can file an application to initiate CIRP against a corporate debtor at the National Company Law Tribunal (NCLT) when a default occurs. This application must be made in the prescribed Form 1, accompanied by records and documents evidencing the default and other specified information.
Adjudication by NCLT: Upon receiving the application, the NCLT has 14 days to ascertain the existence of a default based on the records or evidence provided. If the NCLT is satisfied that a default has occurred, the application is complete, and there are no disciplinary proceedings against the proposed resolution professional, it may admit the application.
Commencement: Upon admission, the corporate insolvency resolution process commences.
Minimum Default Amount: Initially, the minimum amount of default required to file an application was INR 1 lakh, but this threshold has been raised to INR 1 crore to prevent the system from being overwhelmed with cases.
Notification to Corporate Debtor and IBBI: The financial creditor must notify the corporate debtor and the IBBI about the application by registered post, speed post, by hand or by electronic means before filing it with the NCLT.
#2 Operational Creditor
Documents and Evidence: The application must include a copy of demand notice, an affidavit stating that no dispute has been raised regarding the unpaid operational debt, a certificate from financial institutions confirming the non-payment of the unpaid operational debt and any other documents as prescribed. It should also propose a resolution professional to act as an interim resolution professional.
Application: If payment is not received after the expiry of 10 days from the date of delivery of demand notice, Operational Creditor shall file an application before before the NCLT for initiating a corporate insolvency resolution process in the prescribed Form 5 , accompanied with documents and records required therein and as specified in the IBBI.
Adjudication by NCLT : The NCLT examines the application within 14 days to determine its completeness. Similar to the process for financial creditors, the NCLT admits or rejects the application based on completeness and other criteria.
Commencement: Upon admission, the corporate insolvency resolution process begins.
Minimum Default Amount: Initially, the minimum amount of default required to file an application was INR 1 lakh, but this threshold has been raised to INR 1 crore to prevent the system from being overwhelmed with cases.
Notification to Corporate Debtor and IBBI: It shall be notified to the corporate debtor and the IBBI about the application through registered post, speed post by hand or by electronic means before filing it with the NCLT.
#3 Corporate Debtor
Documents and Evidence: When filling an application Corporate Debtor must provide information relating to its books of account, must include details of resolution professional to be appointed as an interim resolution professional and must furnish a special resolution passed by its shareholders or a resolution passed by at least three-fourths of the total number of partners of the corporate debtor as approves the filing of the application.
Application: Where a corporate debtor has committed a default, a corporate applicant may file an application to initiate CIRP with the NCLT in the prescribed form 6 accompanied with documents and records specified in the IBBI.
Adjudication by NCLT: The NCLT examines the application within 14 days to determine completeness. If the NCLT is satisfied that a default has occurred and the application is complete it admits the application
Commencement: Upon admission, the corporate insolvency resolution process commences.
Minimum Default Amount: Initially, the minimum amount of default required to file an application was INR 1 lakh, but this threshold has been raised to INR 1 crore to prevent the system from being overwhelmed with cases.
Notification to Corporate Debtor and IBBI: It shall be notified to the corporate debtor and the IBBI about the application through registered post, speed post by hand or by electronic means before filing it with the NCLT.
2. Role of the Interim Resolution Professional
The Interim Resolution Professional (IRP) is appointed by the Adjudicating Authority within fourteen (14) days from the commencement of insolvency proceedings. The IRP’s responsibility is to oversee the smooth transition into the resolution phase. This key intermediary ensures that the necessary groundwork is laid for the efficient management of assets.
Appointment and Duties – Sections 16 and 18 of the IBC 2016 include provisions relating to the Appointment and Duties of an Interim Resolution Professional (“IPR”).
Appointment
IRP is appointed within 14 days from the initiation of the insolvency resolution process.
If the application for insolvency is made by a financial creditor, an operational creditor or the corporate debtor themselves under section 7, 9 or 10 of the IBC the proposed resolution professional mentioned in the application is appointed as the IRP, provided there are no disciplinary proceedings against them.
If no IRP is proposed in the application, the Adjudicating Authority requests the IBBI to recommend an insolvency professional to serve as the IRP. The professional recommended by the IBBI is appointed as the IRP, again subject to no pending disciplinary actions.
Duties
- The IRP gathers information related to the corporate debtor’s assets, finances and operations to assess its financial position,
- The IRP receives and organises all claims submitted by creditors after the public announcement of insolvency made under sections 13 and 15.
- The IRP forms a committee of creditors.
- The IRP keeps a check on the corporate debtor’s assets and manages its operations until a resolution professional is appointed by the creditor committee.
- If necessary, the IRP files the collected information with the information utility as per the requirements.
- IRP takes control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtors or any other registry that records the ownership of assets.
Creditor Committee Formation
After gathering claims evaluating the corporate debtor’s financial status, the IRP forms the Committee of Creditors.
Each creditor, if part of a group of financial creditors, has the right to be represented in the committee, allowing them to individually represent their interests. Decisions in the committee require at least a 75% majority of the total voting shares of financial creditors. The committee can also request financial information from the resolution professional within 7 days to maintain transparency and facilitate informed decisions during the resolution process.
3. Development of the Resolution Plan
A resolution plan under the IBC, 2016, aims to solve the corporate debtor’s insolvency issue by needing approval from the Committee of Creditors (CoC).
The plan must meet IBC’s mandatory requirements and ensure the payment of insolvency resolution process costs, management of the debtor’s affairs post-approval, and compliance with applicable laws. The CoC approves a plan with at least a 66% vote of financial creditors, based on its feasibility and viability.
Plan Formulation:
- The Resolution Professional (RP) publishes a public announcement in Form G, inviting interested candidates or bidders to submit a resolution plan for the distressed company undergoing insolvency proceedings.
- The RP verifies the eligibility of prospective resolution applicants and facilitates due diligence activities to provide them with a comprehensive understanding of the company’s situation.
- Prospective Resolution Applicants (RAs) submit their resolution plans within the prescribed due date mentioned in Form G. The plan must address the payment of insolvency resolution process costs, payments to operational creditors and the management of the company upon plan implementation.
- The RP assesses whether the submitted plan meets the basic requirements of the Insolvency and Bankruptcy Code (IBC). This includes ensuring compliance with the provisions of the Code and related regulations.
- The RP submits all resolution plans that comply with the requirements of the Code and regulations to the CoC for evaluation
- The CoC evaluates all submitted resolution plans, considering their feasibility and viability. Deliberations are recorded and the CoC votes on all plans simultaneously.
Approval and Implementation
The resolution plan for an insolvent company needs approval within 180 days of starting the CIRP, extendable by 90 days. The NCLT reviews the plan to ensure compliance with IBC standards and can approve or reject it.
Approval binds all stakeholders, leading to the plan’s implementation by the Resolution Professional (RP), involving debt restructuring and operational adjustments. If unapproved, liquidation may follow. The RP must secure necessary legal approvals within a year post-NCLT approval. [2]
4. Conclusion of the Process
A resolution plan’s approval and execution mark a successful conclusion, leading to a company’s revival or restructuring, ensuring its sustainable operation and fulfilling creditor obligations. However, if the plan isn’t approved within the set timeline or doesn’t meet its goals, the process may result in liquidation.
Successful Resolution.
In insolvency cases, a successful resolution leads to a company’s revival through an approved and implemented plan, ensuring financial health and creditor satisfaction. If the plan isn’t approved in time or fails to meet criteria, liquidation may ensue, selling assets to repay creditors as a final measure.
Liquidation
Following are the circumstances under which liquidation occurs if a resolution plan is not approved-
Failure to Receive a Resolution Plan: If the Adjudicating Authority doesn’t receive a resolution plan that meets section 31’s criteria by the deadline, it orders the liquidation of the corporate debtor.
Rejection of Resolution Plan: If the Adjudicating Authority rejects a resolution plan for not meeting legal standards, failing to consider creditor interests, or lacking a viable revival strategy, it will order the company’s liquidation.
Decision of the Committee of Creditors: If, at any point during the CIRP the resolution professional informs the Adjudicating Authority of the Committee of Creditors decision to liquidate the corporate debtor, the Authority shall pass a liquidation order.
Contravention of Approved Resolution Plan: If a corporate debtor breaks the terms of an approved resolution plan, any impacted party can request a liquidation order from the Adjudicating Authority. If the Authority confirms the breach, it will issue a liquidation order
Frequently Asked Questions
1. What is the Corporate Insolvency Resolution Process under IBC?
The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) 2016 is a structured process for resolving financial distress and insolvency issues of corporate debtors.
2. Who can initiate the Corporate Insolvency Resolution Process?
- A Financial Creditor
- An operational creditor
- A corporate applicant of a corporate debtor
3. What are the key steps in the Corporate Insolvency Resolution Process?
The key steps in the Corporate Insolvency Resolution Process include-
- Initiation
- Appointment of a resolution professional
- Formulation of a resolution plan
- Approval of the plan
- Implementation of the approved plan.
4. How does the moratorium period work in the resolution process?
During the moratorium period in the resolution process, creditors are prohibited from initiating or continuing any legal action against the debtor.
5. What role do creditors play in the Corporate Insolvency Resolution Process?
Creditors play a pivotal role in the Corporate Insolvency Resolution Process by participating in the committee of creditors, assessing resolution plans, and voting on decisions crucial to the fate of the debtor company.
6. What happens if a resolution plan is not approved?
If a resolution plan is not approved, the company may be liquidated as per the provisions of the Insolvency and Bankruptcy Code.
Final Thoughts
The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) serves as a crucial mechanism for addressing insolvency issues among corporate debtors in India. The significance of the CIRP lies in its structured framework, which aims to resolve insolvency issues while safeguarding the interests of creditors and facilitating either the revival or liquidation of corporate debtors.
Navigate Corporate Insolvency with Expertise and Confidence
Understanding the Corporate Insolvency Resolution Process is essential for businesses facing financial challenges, as it offers a systematic approach to navigate through economic difficulties and explore either revival or orderly liquidation. A Agarwalla’s keen understanding of the intricacies involved can help you navigate this process with confidence and clarity. We provide strategic insights and practical solutions for navigating the complexities of the CIRP.