Complete Guide to Corporate Insolvency Resolution

Introduction:

The Corporate Insolvency Resolution Process (CIRP) is a crucial mechanism within the Insolvency and Bankruptcy Code, 2016, designed to address and resolve corporate insolvency in an organized and timely manner. It serves as an essential tool for maintaining corporate continuity while managing defaults and financial distress effectively.

CIRP operates through a series of defined stages aimed at facilitating creditor participation, appointing resolution professionals, and formulating viable resolution plans. By establishing a framework that allows financial and operational creditors, as well as corporate applicants, to initiate the process, the Code seeks to ensure fair and efficient resolution proceedings.

CIRP: Basic Concepts 

• Definition:

The Corporate Insolvency Response Procedure is the procedure for addressing corporate insolvency of a corporate debtor as per the Code's provisions. It is triggered by a corporate debtor's default.

• Minimum Default Amount:

When the default amount is at least INR 1 crore (INR 10 million), the insolvency process under the Code applies. Initially, the minimum default amount to initiate CIRP was INR 1 lakh, but the Government increased it to INR 1 crore through a notification on March 24, 2020.

• Initiation of CIRP:
  • The CIRP is initiated by filing an application before the Adjudicating Authority, as detailed in Chapter II of Part II of the Code.
  • The entities that are eligible to initiate CIRP comprise of financial creditors (FCs), operational creditors (OCs), and corporate applicants of the corporate debtor.

• Eligibility to Initiate CIRP:
  • Financial Creditor (FC) under Section 7: A person to whom a financial debt is owed, including those who have legally acquired or been assigned the debt.
  • Operational Creditor (OC) under Section 8: Any person to whom an operational debt is owed, including claims from the supply of goods and services and dues to governmental authorities.
  • Corporate Applicant under Section 10: This includes the corporate debtor itself, or a member, partner, or authorized individual according to the corporate debtor's constitutional documents. It can also refer to someone managing the corporate debtor's operations and resources or controlling its financial affairs.

• Financial Debt and Operational Debt:
  • Financial Debt: It includes debts that were provided in exchange for the time value of money, including interest. It also covers various liabilities outlined in Section 5(8)(a) to (i) of the Code, such as borrowed amounts with interest and financial obligations from lease or hire-purchase contracts.
  • Operational Debt: It arises from the provision of goods and services, and may also encompass claims pertaining to employment or remittances to governmental authorities.

Stages of CIRP

• Initiation of CIRP: The CIRP of a corporate debtor begins when the Adjudicating Authority (AA) issues an order admitting an application to initiate the process, which can be filed by a financial creditor, operational creditor, or the corporate applicant. The date of this order is recognized as the insolvency commencement date (ICD).
• Moratorium and Public Announcement:
  • A moratorium is declared under Section 14 of the Code.
  • An Interim Resolution Professional (IRP) is appointed to take control and custody of the corporate debtor.
  • The powers of the board of directors or partners of the corporate debtor are suspended.
  • A public announcement is made inviting claims from the creditors of the corporate debtor.
• Constitution of Committee
  • Collect and verify claims, establish the Committee of Creditors, and prepare a list of creditors.
  • Submit a report certifying the formation of the Committee of Creditors and the list of creditors to the Adjudicating Authority.
  • Hold the first meeting of the Committee of Creditors within 7 (seven) days of filing the report.
  • The committee sets the expenses for the Resolution Professional (RP), which will be considered insolvency resolution process costs.
  • The Committee of Creditors, whose investment and interest are at stake, serves as the decision-making body for the Corporate Debtor. Actions taken by the Interim Resolution Professional (IRP) or RP must be ratified by the committee members.

• Appointment of Resolution Professional

• The Committee of Creditors (CoC) decides on the appointment of the Resolution Professional (RP).
• Two registered valuers are appointed to assess the fair value and liquidation value of the corporate debtor.

• Powers and Duties of IRP/RP

• The Interim Resolution Professional (IRP) or Resolution Professional (RP) may appoint additional professionals, including registered valuers, to assist in carrying out duties during the corporate insolvency resolution process.
• The RP can sell unencumbered assets of the corporate debtor outside the ordinary course of business if deemed necessary for better value realization. However, the book value of all sold assets combined must not exceed ten percent of the total claims admitted by the IRP.
• The resolution professional must determine whether the corporate debtor has engaged in any transactions covered under sections 43, 45, 50, or 66 of the Code.

• Initiation of Expression of Interest Process

• The resolution professional will publish brief details of the invitation for expression of interest in Form G. The public announcement indicates that the corporate debtor is undergoing insolvency proceedings and invites interested candidates or bidders to submit a resolution plan.
• The resolution professional will verify the eligibility of all prospective resolution applicants and conduct due diligence.
• Prospective resolution applicants must submit their resolution plans by the due date specified in Form G.
• The proposed plan must address payment of CIRP costs as a priority, payment to operational creditors, and management of the corporate debtor’s affairs upon implementation. It must also comply with other requirements set by the Code and its regulations.
• The resolution professional will ensure that the submitted plans meet the Code's basic requirements.
• The resolution professional will present all compliant resolution plans to the committee.
• The committee will then evaluate each plan, discuss their feasibility and viability, and vote on all resolution plans simultaneously.

• Approval of Resolution Plan

• The resolution plan must be approved by the Committee of Creditors (CoC) with at least 66% of the votes.
• The approved plan is then submitted to the Adjudicating Authority for approval.
• Once authorized by the Adjudicating Authority, the resolution plan is implemented.
• If the resolution plan is not approved or submitted within the CIRP period, the corporate debtor may face liquidation.

Time Limit For Completion Of CIRP Process:

According to Section 12(1) of the Code, the CIRP must be completed within 180 days from the date the application to initiate the process is admitted. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum allowable time for completing the CIRP, including any extensions or litigation period, is 330 days.

Conclusion:

While the CIRP framework offers a clear method for reviving failing companies and balancing creditor interests with business rescue, its success depends on continuous improvement. Recent amendments have improved transparency and efficiency, but challenges persist. Uncooperative former promoters and sector-specific complexities continue to create difficulties for RPs. The future effectiveness of the CIRP framework relies on proactively addressing these issues as it evolves, ensuring it remains a robust tool for corporate turnaround.