Detailed Breakdown of the CIRP Process and Negotiations

 

Detailed Breakdown of the CIRP Process and Negotiations

In the Corporate Insolvency Resolution Process (CIRP) under the IBC, the debtor is given a chance to negotiate with creditors to come up with a resolution plan that ensures the company’s survival, maximizes recovery for creditors, and avoids liquidation. Here's a detailed look at how this works in practice:

A. The Role of Resolution Professional (RP)

1. Appointment of RP:

   • Upon the initiation of CIRP, an independent Resolution Professional (RP) is appointed by the National Company Law Tribunal (NCLT). The RP manages the day-to-day affairs of the company, assesses the financial situation, and oversees the resolution process.

2. Functions of the RP:

   • Forming the Committee of Creditors (CoC): The RP creates the CoC, which consists of all creditors (financial and operational) who have a claim against the debtor.

   • Managing the Insolvency Process: The RP is responsible for managing the company’s affairs during the process, ensuring the assets are protected, and negotiating with resolution applicants on behalf of the creditors.

B. The Role of the Committee of Creditors (CoC)

1. Composition of CoC:

   • The CoC is primarily composed of financial creditors (banks, financial institutions, etc.) as they hold the largest share of the debtor’s debt. Operational creditors are also included, but their voting power is typically lower.

2. Voting on the Resolution Plan:

   • Once the resolution plan is received from applicants, the CoC evaluates it based on several factors, including:

     • The liquidation value of the debtor’s assets.

     • Recovery timelines for creditors.

     • The viability and feasibility of the resolution plan.

   • The CoC votes on the plan, with the requirement of a 75% majority by value (i.e., creditors holding at least 75% of the debt value must approve the plan for it to pass).

3. Negotiating the Resolution Plan:

   • Resolution applicants often need to negotiate with the CoC to revise their resolution plans to ensure approval. These negotiations are intense, particularly when there are diverse creditor interests (e.g., operational creditors may want immediate payments, while financial creditors may prioritize restructuring).

4. Operational Creditors’ Influence:

   • Although operational creditors are ranked lower in the hierarchy (receiving payment after financial creditors), their vote becomes important if they hold significant claims.

   • They may negotiate for improved payment terms, equity stakes, or even future business guarantees as part of the resolution plan.

C. Factors Impacting Creditor Voting Dynamics

1. Stakeholder Interests:

   • Financial creditors (usually large banks) have different priorities compared to operational creditors (e.g., suppliers, service providers).

     • Financial creditors might prioritize debt recovery, while operational creditors could focus on the company’s continued operations and future business relations.

   • In some cases, financial creditors may be willing to accept reduced repayments (in terms of both principal and interest) if they believe that restructuring is the only viable option to ensure long-term recovery.

2. Equity Offers and Debt Restructuring:

   • Equity offers are a common tool used by resolution applicants to incentivize creditors to accept a particular resolution plan. This could involve offering equity in the company in exchange for debt forgiveness or extended repayment timelines.

   • If creditors are given a stake in the company, they are more likely to vote in favor of a resolution plan, as they stand to gain from the company’s future profitability.

3. Negotiations Post-Vote:

   • Even after the initial vote, there may be further negotiations on how the resolution plan can be modified to address concerns from various stakeholders, especially operational creditors. These negotiations are critical if the plan does not meet the necessary 75% approval.