Debtor and Creditors in CIRP: Detailed Interaction

 

Debtor and Creditors in CIRP: Detailed Interaction

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1. Initial Stages of CIRP: Admission and Appointment of IRP

1. Debtor's Role:

   • Filing of Defense: If the debtor believes that the application for CIRP is unwarranted (for instance, if no actual default has occurred or there is a pre-existing dispute), the debtor can present its case before the National Company Law Tribunal (NCLT) and argue against the initiation of the CIRP.

   • Compliance: After the admission of the application, the debtor must comply with the CIRP process and cooperate with the Interim Resolution Professional (IRP).

2. Creditor's Role:

   • Filing the Application: Creditors (either financial or operational) are the ones who initiate the CIRP by filing an application before the NCLT. They must prove that the debtor has defaulted on a debt of ₹1 lakh or more.

   • Submission of Claims: Creditors (both operational and financial) must submit their claims to the IRP within a specific time frame, typically 14 days from the appointment of the IRP.

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2. Appointment of Interim Resolution Professional (IRP) and Moratorium

1. Debtor's Role:

   • Loss of Management Control: Once the IRP is appointed, the debtor loses control over the management of its business. The IRP takes over the operational control and decision-making of the company, and the management of the company is replaced by the IRP.

   • Cooperation with IRP: The debtor is required to cooperate with the IRP, provide necessary documentation, and assist in the resolution process.

   • Management of Assets: The debtor can continue to operate the business under the IRP’s supervision but must avoid taking major decisions such as selling assets or making payments without the IRP's consent.

   • Facilitating Resolution Plan: If the debtor has a proposed resolution plan, it can present the plan to the Committee of Creditors (CoC), but the decision-making power lies with the CoC.

2. Creditor's Role:

   • Committee of Creditors (CoC): Once the CIRP is initiated, a Committee of Creditors (CoC) is formed, primarily consisting of financial creditors (such as banks, financial institutions, etc.).

     • Role of CoC: The CoC is responsible for overseeing the resolution process, approving the resolution plan, and making key decisions regarding the future of the company.

   • No Actions Against Debtor: During the moratorium period, creditors cannot take legal action against the debtor. They must wait for the resolution process to proceed or participate in formulating a resolution plan.

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3. Resolution Plan: Debtor and Creditor Interaction

1. Debtor's Role:

   • Proposal of Resolution Plan: The debtor, along with the IRP, may propose a resolution plan if it believes the business can be restructured, re-financed, or sold to a third-party investor.

     • The debtor may engage with investors or buyers to propose a sale of assets, restructuring of debts, or a settlement of liabilities.

   • Negotiation with Creditors: The debtor may also participate in negotiations with the CoC to adjust terms in the proposed resolution plan to make it more acceptable to the creditors.

2. Creditor's Role:

   • Approval of Resolution Plan: Once a resolution plan is proposed by the debtor (or a third party), the CoC reviews and votes on it. A 75% majority of the financial creditors is required to approve the plan.

   • Negotiation Power: Creditors can negotiate terms within the plan, such as:

     • Amount to be paid to each creditor.

     • Structure of payments (lump-sum, installments, etc.).

     • Changes to interest rates, penalties, or asset sales.

   • Voting Rights: If the CoC approves the plan by a 75% majority vote, the plan is submitted to the NCLT for final approval. Operational creditors may not have as much voting power as financial creditors, but they can still voice their concerns during the approval process.

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4. Post-Approval of Resolution Plan

1. Debtor's Role:

   • Implementation of Plan: Once the NCLT approves the resolution plan, the debtor must implement it. This may involve debt repayment, restructuring of the company’s operations, sale of assets, or other methods to repay creditors.

   • Return of Control: If the plan successfully resolves the insolvency and creditors are repaid in line with the plan, the debtor resumes control over its business and operations.

   • Adherence to Resolution Plan: The debtor must adhere to the terms of the approved resolution plan and execute it within the stipulated time frame.

2. Creditor's Role:

   • Payment: The creditors (especially financial creditors) receive payment in accordance with the terms of the approved resolution plan.

   • Monitoring: Creditors may continue to monitor the debtor's adherence to the resolution plan and ensure that the business is being properly managed during and after the implementation phase.

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5. Liquidation: Debtor and Creditors’ Role if Resolution Fails

1. Debtor's Role:

   • Liquidation Process: If no resolution plan is approved within the stipulated timeline (180 days, extendable by 90 days), or the resolution plan is rejected, the company enters liquidation.

     • Appointment of Liquidator: The NCLT appoints a liquidator who will take control of the company’s assets and begin selling them off.

   • Winding Up of Business: The debtor's business operations cease, and assets are sold for the benefit of creditors.

2. Creditor's Role:

   • Claims in Liquidation: Creditors must file their claims with the liquidator. The liquidation proceeds are distributed to creditors in a specific order:

     1. Secured creditors (who have collateral for the debt).

     2. Unsecured creditors (operational and financial creditors).

     3. Equity shareholders (if any value remains).

   • Claim Priority: Creditors with secured debts have priority over those with unsecured debts. Operational creditors generally receive a lower priority than financial creditors.

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6. Debtor and Creditors Interaction in Liquidation

1. Debtor's Role:

   • Cooperation with Liquidator: The debtor must cooperate with the liquidator to ensure the liquidation process proceeds smoothly, including providing all required documents and assistance in selling assets.

   • Obligation to Act in Good Faith: The debtor must act in good faith and ensure no fraudulent transfers or asset concealments take place during liquidation.

2. Creditors' Role:

   • Claim Verification: Creditors must submit their claims for verification by the liquidator, who will determine the amount each creditor is entitled to.

   • Asset Distribution: The creditors will receive payment from the sale of assets in order of priority, as stipulated under the IBC.

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Conclusion:

The CIRP process under the IBC requires active cooperation between the debtor and the creditors to reach a resolution that either involves the restructuring of debts, sale of assets, or, if no solution is found, liquidation. The debtor's role is primarily about cooperation, compliance, and presenting a resolution plan, while the creditors (especially financial creditors) have the critical role of deciding whether the resolution plan is acceptable, voting on it, and ensuring that the debtor adheres to the terms.

If the resolution fails, the process moves toward liquidation, where the debtor's assets are sold, and the creditors are paid according to their priority.