Saturday, May 10, 2025

the Corporate Insolvency Resolution Process (CIRP) and how both the debtor and creditor roles are managed during insolvency under the Insolvency and Bankruptcy Code (IBC), 2016

 Let's break down the Corporate Insolvency Resolution Process (CIRP) and how both the debtor and creditor roles are managed during insolvency under the Insolvency and Bankruptcy Code (IBC), 2016.

1. Corporate Insolvency Resolution Process (CIRP)

The CIRP is the process through which a distressed corporate entity seeks to resolve its insolvency situation either by restructuring its debts, entering into a settlement, or facing liquidation if no resolution is reached.

Key Stages of CIRP:

  1. Initiation of CIRP:

    • Who can initiate CIRP: A financial creditor, operational creditor, or the corporate debtor itself can initiate the CIRP process.

    • Application to NCLT: The creditor (either operational or financial) files an application before the National Company Law Tribunal (NCLT) for the initiation of CIRP.

    • Timeframe: The NCLT must admit or reject the application within 14 days from the date of the application.

    • Admission Criteria: The creditor must prove the existence of a default in debt payment. If the default is above ₹1 lakh (for corporate debtors), the application is likely to be admitted.

  2. Appointment of Interim Resolution Professional (IRP):

    • IRP Appointment: Upon admission of the CIRP, the NCLT appoints an Interim Resolution Professional (IRP), who takes control of the debtor’s affairs.

    • Role of IRP: The IRP assumes control of the corporate debtor's assets, management, and operations, and ensures that the debtor's business is managed during the insolvency process.

    • Public Announcement: The IRP makes a public announcement inviting claims from creditors and appoints the Committee of Creditors (CoC).

  3. Constitution of Committee of Creditors (CoC):

    • CoC Formation: A Committee of Creditors (CoC) is formed by the IRP, consisting of financial creditors (such as banks, financial institutions, bondholders, etc.).

    • CoC's Role: The CoC plays a crucial role in determining the direction of the CIRP, including approving or rejecting resolution plans. It is essentially responsible for managing the resolution process.

    • Decision-making Power: The CoC makes decisions related to the resolution plan, liquidation, and other important steps during the insolvency process. The majority vote of 75% is required for any decision.

  4. Moratorium:

    • Moratorium Period: A moratorium is declared once the CIRP is initiated, during which no legal actions (such as suits or recovery proceedings) can be taken against the corporate debtor.

    • Protection for Debtor: The moratorium ensures that the debtor’s assets remain intact during the resolution process and that no asset is liquidated or sold off without proper procedures.

  5. Resolution Plan:

    • Submission of Resolution Plans: During the CIRP, potential resolution applicants can submit their resolution plans. A resolution plan typically includes proposals for the settlement of debts, restructuring of operations, or the sale of assets.

    • Role of CoC: The CoC reviews the proposed resolution plan. If the CoC approves the plan by a majority vote (75%), the plan is submitted to the NCLT for final approval.

    • Approval by NCLT: The NCLT approves the resolution plan if it meets the statutory requirements under the IBC. Once approved, the plan becomes binding on all stakeholders, including creditors.

  6. Outcome of CIRP:

    • Successful Resolution: If the resolution plan is successfully approved, the corporate debtor is restructured, and the creditors’ claims are settled in line with the plan.

    • Failure of Resolution: If the CIRP fails to result in an approved resolution plan, the company is subjected to liquidation.

    • Timeframe: The CIRP is meant to be completed within 180 days, extendable by 90 days, which ensures timely resolution.

2. Role of Debtor in CIRP:

  1. Debtor’s Control:

    • Before CIRP: The corporate debtor retains management control before the insolvency application is admitted. The directors and management of the company are still in charge.

    • During CIRP: Once the CIRP process is initiated, the debtor’s management is replaced by the Interim Resolution Professional (IRP), who takes control of the debtor’s affairs.

    • Debtor’s Role in Resolution Plan: The debtor can play an active role in proposing a resolution plan to the CoC. However, the decision-making power lies with the CoC.

  2. Cooperation with IRP:

    • The debtor is expected to cooperate with the IRP and the CoC, providing necessary information and assisting in the resolution process.

    • The debtor can participate in negotiations and contribute to formulating the resolution plan.

  3. Opportunity for Restructuring:

    • The debtor can present a restructuring plan or negotiate a settlement, provided it meets the conditions laid out by the CoC.

  4. Defending Against Insolvency:

    • If the debtor believes that the application for CIRP is not valid (for example, due to no default or a pre-existing dispute), it can file a defense against the application in the NCLT.

3. Role of Creditors in CIRP:

  1. Financial Creditors:

    • Financial creditors (such as banks and financial institutions) play a significant role in the CIRP. They are the main decision-makers during the process through their participation in the Committee of Creditors (CoC).

    • They vote on resolution plans, approve or reject proposals, and control the outcome of the process.

    • Financial creditors typically have more voting power, especially in the case of secured creditors.

  2. Operational Creditors:

    • Operational creditors (suppliers, service providers) are also eligible to participate in the process, but their role is generally more limited compared to financial creditors.

    • They can submit claims and participate in the CoC. However, their influence in decision-making is relatively weaker because they typically hold a smaller portion of the overall debt.

  3. CoC's Decision-making:

    • Majority Voting: The CoC decides major steps during the insolvency resolution process, such as the acceptance of resolution plans. A majority vote (75% of financial creditors) is required to approve or reject decisions.

    • Priority of Payments: The CoC will also prioritize creditors based on the order of payment under the IBC, with secured creditors taking precedence over unsecured creditors.

4. Liquidation (If Resolution Fails):

If no resolution plan is approved within the stipulated period of 180 days (extendable by 90 days), or if the resolution plan is rejected by the NCLT, the corporate debtor enters liquidation under the IBC.

  1. Appointment of Liquidator: The NCLT appoints a liquidator, who takes control of the debtor’s assets and oversees their sale.

  2. Asset Distribution: The assets of the debtor are sold, and the proceeds are distributed among creditors according to their priority (secured creditors are paid first, followed by unsecured creditors).

  3. Final Dissolution: After the liquidation process, the company is dissolved.

Conclusion:

In the Corporate Insolvency Resolution Process (CIRP) under the IBC, 2016, the debtor plays a critical role in cooperating with the Interim Resolution Professional (IRP), negotiating a resolution plan, and potentially resolving the insolvency. Creditors, especially financial creditors, have significant powers in decision-making during the CIRP, primarily through the Committee of Creditors (CoC). If the resolution process fails, the company enters liquidation, where a liquidator is appointed to sell the debtor’s assets and distribute the proceeds to creditors.

Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)