The Corporate Insolvency Resolution Process (CIRP) is a legal procedure established under the Insolvency and Bankruptcy Code, 2016 (IBC) in India, with the objective of addressing the insolvency of corporate entities. The Corporate Insolvency Resolution Process is governed by Section 7 to Section 32 of the Insolvency and Bankruptcy Code, 2016. Section 7 of the Insolvency and Bankruptcy Code, 2016provides for the initiation of the Corporate Insolvency Resolution Process by a financial creditor, while Section 9provides for the initiation by an operational creditor.
Once the Corporate Insolvency Resolution Process is initiated, the process and the various stages involved are laid out in Sections 12 to 32 of the Insolvency and Bankruptcy Code, 2016. It is a time-bound process that aims to provide a quick resolution of insolvency, either through the revival of the company or through liquidation.
For insolvency resolution and bankruptcy proceedings of companies, partnership firms, as well as individuals, a unified framework, is provided in the code. To balance out the interests of stakeholders, encouraging entrepreneurship and accessibility of credit are the prime objective of the Code. In situations like default in debt payments, the provision of the code states that an operational creditor, the corporate debtor itself, or a financial creditor can initiate Corporate Insolvency Resolution Process. The appointment of an Interim Resolution Professional (IRP) via the National Company Law Tribunal i.e., the NCLT is the beginning of the CIRP process.
The powers of the boards of directors are suspended when the Interim Resolution Professional takes over the control of the corporate debtor management. A thorough investigation regarding the financial affairs of the corporate debtor is carried out along with the claims from the creditors are also invited by the Interim Resolution Professional. Responsibility for taking decisions in relation to the resolution process is done by the committee formed by the creditors generally known as the Committee of creditors (CoC). The CoC can approve a resolution plan proposed by a resolution applicant, or decide to liquidate the corporate debtor if noviable resolution plan is found.
The CIRP process is time-bound, with a maximum period of 330 days for completion, including any extension granted by the NCLT. The Code provides for the distribution of proceeds from the sale of assets of the corporate debtor among the creditors in a specified priority order. Overall, the CIRP process provides a transparent and efficient mechanism for the resolution of corporate insolvency in India, which benefits all stakeholders, including creditors, shareholders, and employees.
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Role Of Resolution Professional(RP)
The roles of Resolution Professionals (RPs) and Debt Recovery Tribunals(DRTs) are intertwined with respect to debt recovery. For handling the affairs of a company that is undergoing the CIRP a Resolution Professional is selected either by the NCLT or the Debt Recovery Tribunal. The role of an R Palso involves overlooking the selling and management of the company’s assets, raising funds, and upholding the operations of the company along with the preparation of a resolution plan which must be submitted for approval by the creditors.
During the resolution process, the Resolution Professional must guarantee protection of interests of the stakeholders, creditors, and the company. However, Debt Recovery Tribunal is a forum, especially for expeditious adjudication and recovery of debts due to banks and financial institutions. It is responsible for resolving disputes between the lender and the borrower and ensures the recovery of debts owed to the lenders. The DRT follows a quasi-judicial process in hearing and deciding cases related to debt recovery. The proceedings are conducted by the provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act,1993, and the rules and regulations made there under.
Procedure For Filing And Hearing Of Cases In DRT
Any bank or financial institution that has non-performing assets (NPAs) can file an application before the DRT for the recovery of the debt. The application must be filed in the prescribed format and must contain details of the debt owed, the borrower, and the security provided for the loan. Once the application is filed, the DRT will issue a notice to the borrower and any other parties involved, asking them to appear before the tribunal on the specified date.
During the hearing, both the lender and the borrower are allowed to present their case and evidence before the tribunal. The tribunal may also summon witnesses or call for additional documents or evidence as required. Once the hearing is concluded, the tribunal will pass an order, either in favour of the lender or the borrower.
The RP is responsible for managing the assets of a company undergoing the CIRP and preparing a resolution plan for the company. If the resolution plan is approved by the creditors and the NCLT, the RP oversees the implementation of the plan. If the plan is not approved, the RP may initiate liquidation proceedings to recover the outstanding debt. In conclusion, both the RP and the DRT play important roles in debt recovery in India.
While the RP is responsible for managing the affairs of a company undergoing the CIRP and preparing a resolution plan for the company, the DRT is responsible for resolving disputes related to debt recovery and ensuring the recovery of debts owed to lenders. The procedure for filing and hearing cases in DRT is governed by the RDDBFI Act, of 1993, and the process for CIRP is governed by the Code, of 2016.
Liquidation Process In Corporate Insolvency Resolution Process
If a company undergoing CIRP, resolution plan is not approved by creditors or NCLT then the liquidation process will be initiated. In such a case, the company is liquidated, and its assets are sold to repay the outstanding debt owed to the creditors.
The liquidation process under CIRP is governed by the Insolvency and Bankruptcy Code, 2016, and the rules and regulations made thereunder. The following are the steps involved in the liquidation process:
- Appointment of Liquidator: During the liquidation process, the NCLT appoints a liquidator to oversee the affairs of the company. The liquidator assumes management and control of the company’s assets and begins the process of selling them in order to repay the creditors.
- Preparation of Asset List: The liquidator prepares a list of all the assets of the company and submits it to the NCLT. The asset list includes all movable and immovable assets of the company, including land, buildings, equipment, and inventory.
- Sale of Assets: The liquidator initiates the process of selling the assets of the company to repay the outstanding debt owed to the creditors. The assets are sold through a public auction or by way of a private sale.
- Distribution of Sale Proceeds: After selling the assets, the money obtained from the sale is distributed among the creditors in accordance with the order of priority as prescribed by the Code, 2016.Secured creditors have the first right over the proceeds, followed by workmen’s dues and unpaid dues to the employees.
- Closure of Liquidation Process: Once all the assets of the company are sold and the proceeds are distributed among the creditors, the liquidator submits a report to the NCLT stating that the liquidation process is complete. The NCLT then issues an order for the closure of the liquidation process.
Challenges Faced During Corporate Insolvency Resolution Process
The corporate Insolvency Resolution Process (CIRP) is a complex and challenging process that involves multiple stakeholders and legal requirements. Some of the significant challenges faced during the CIRP are as follows:
- Lack of Adequate Information: One of the significant challenges in the CIRP process is the lack of adequate and reliable information about the debt or company’s financial position, which hinders the identification of potential resolution plans.
- Delay in Process: The CIRP process involves multiple stages and requires the coordination of various stakeholders, leading to delays in the process, which may affect the value of assets and the interest of stakeholders.
- Limited Participation of Stakeholders: The participation of stakeholders, such as creditors, investors, and operational creditors, in the CIRP process, is limited, leading to conflicts and disagreements, which may delay the process and affect the outcome.
- The complexity of Resolution Plans: The resolution plans submitted by the bidders are often complex and require significant financial, legal, and technical expertise, which may be challenging for smaller companies or individual bidders to comprehend.
- Litigation and Appeals: The CIRP process is subject to litigation and appeals, which may delay the process and increase the cost of resolution.
- Uncertainty about the Outcome: The outcome of the CIRP process is uncertain, and there is no guarantee that the resolution plan will be approved or that the assets will be sold at the expected value, which may deter potential bidders and affect the interest of stakeholders
The Corporate Insolvency Resolution Process (CIRP) is a legal mechanism that helps in debt recovery and corporate restructuring. CIRP provides a structured and time-bound process for resolving financial distress in companies and helps in creating a stable and predictable business environment. Legal requirements must comply during Corporate Insolvency Resolution Process if there is a proposal for any corporate restructuring by the creditors and the NCLT.
The importance of the Corporate Insolvency Resolution Process (CIRP) lies in its ability to facilitate debt recovery, corporate restructuring, preservation of value, protection of the interests of stakeholders, and boost the investment climate. The importance of CIRP can be understood as follows:
- Debt Recovery: CIRP provides a structured and time-bound process for debt recovery by enabling creditors to initiate insolvency proceedings against a company that has defaulted on its debt obligations. The CIRP process allows for a fair and transparent resolution of debt and ensures that the interests of all stakeholders, including creditors, are protected.
- Corporate Restructuring: CIRP provides an opportunity for corporate restructuring by allowing the debtor company to explore various restructuring options, including the sale of assets, the merger of the company with another entity, or the infusion of capital. The CIRP process helps the company to reorganize its affairs and address the underlying issues that led to its financial distress.
- Preservation of Value: CIRP provides for the preservation of the value of the company’s assets by ensuring that the assets are managed by a professional and independent insolvency resolution professional (IRP) during the process. This helps in preventing the depletion of the company’s assets and ensures that the assets are sold at the best possible price.
- Protection of Interests of Stakeholders: CIRP provides for the protection of the interests of all stakeholders, including creditors, employees, shareholders, and other stakeholders, by providing a transparent and fair process for the resolution of the company’s financial distress.
- Boost to Investment Climate: CIRP provides a boost to the investment climate by creating a level playing field for all investors and ensuring that the resolution process is transparent and predictable. This helps in increasing investor confidence in the market and attracting new investments.
What happens if a resolution plan is not approved in the CIRP?
If a resolution plan is not agreed upon and approved during the CIRP, the company will face liquidation. The insolvency professional in charge of the CIRP will request the liquidation of the company with the NCLT once the resolution process period has ended. After the NCLT approves the liquidation request, a liquidator is appointed to sell off the company’s assets and distribute the proceeds to the creditors in accordance with the priority order specified in the IBC, 2016.
How can a company prepare for the CIRP process?
A company can prepare for the CIRP process by maintaining proper books of accounts and financial records, identifying potential risks, developing a contingency plan, appointing a CFO, engaging with creditors, identifying potential resolution professionals, conducting regular internal audits, and taking corrective actions, if necessary. By taking these steps, the company can mitigate the risk of financial distress and be better prepared to manage the CIRP process, if required.
What is the liquidation process in the CIRP?
The liquidation process in the CIRP is initiated when a resolution plan is not approved within the specified period, or the approved resolution plan is not implemented within the specified period. The liquidation process is a time-consuming and expensive process that results in a significant loss of value for the company’s stakeholders, including creditors, shareholders, and employees. Therefore, the resolution of the company’s financial distress through the approval of a resolution plan is always preferable over liquidation.
 Insolvency and Bankruptcy Code, 2016 (IBC)
National Informatics Centre, “The Constitution (Eighty-First Amendment) Act, 2000,” (India), accessed March 15, 2023, https://legislative.gov.in/sites/default/files/A1993-51_0.pdf.
Recovery of Debts Due to Banks and Financial Institutions Act 1993 (RDDBFI Act), s 19.
Insolvency and Bankruptcy Code, 2016 (IBC), ss 33-54; Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, reg 3.
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