EXPLORING CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP) UNDER THE IBC OF 2016

By Ritik Agrawal•February 8, 2025•6 min read•191 views

Agastya Kaushik,

ILS Law College, Pune

A hand holds a $ symbol with "CORPORATE INSOLVENCY" text over it. Gray tones, minimal design, suggesting financial issues.

Introduction

The new Insolvency and Bankruptcy Code 2016 (IBC) has created the Corporate Insolvency Resolution Process (CIRP) to help India solve business debt problems through a planned process that works within strict time limits. The CIRP lets troubled companies through IBC fix their debt issues and handle claims made by lenders while preparing to sell company assets if needed. The IBC reduced complex, burdensome steps that took too long to resolve and only worked for debt collection but not for company restructuring. Before the IBC took effect different laws handled insolvency issues including the Sick Industrial Companies (Special Provisions) Act from 1985 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002. Under this process, creditors can collect what they owe while troubled companies can receive a legal rescue plan. This paper studies the Corporate Insolvency Resolution Process by reviewing its rules, difficulties, changes, and possible next steps supported by specific cases.

Key Provisions of Companies Act of 2013

1. Initiation of CIRP

Under IBC Sections 7, 8, 9, and 10 financial creditors, operational creditors, or the corporate debtor can initiate CIRP procedures. For instance, in the Innovative Industries Ltd. v. ICICI Bank (2018) [1] case, ICICI Bank initiated proceedings under Section 7 of the IBC, which allows financial creditors to apply to NCLT for initiating CIRP against a defaulting debtor. A decision from NCLT comes within 14 days to either allow or stop the CIRP while initiating the process. You must finish the process 180 days after its admission date.

2. Appointment of Interim Resolution Professional

Following approval of the CIRP request, NCLT starts the process by stopping specific business happenings while making public both the CIRP start and interim resolution professional selection. Under section 16, the court designates an interim resolution professional to handle the debtor's business affairs, ensure proper documentation, and keep operations running smoothly.

3. Committee of Creditors (CoC)

The interim resolution professional constitutes a committee of creditors under section 21, which consists of all the company's financial creditors. The CoC in its first meeting which has to be conducted within 7 days after its formation, appoints a resolution professional under section 22 and makes key decisions, including the approval of resolution plans. In Essar Steel India Ltd. v. Satish Kumar Gupta (2019) [2], the Supreme Court upheld CoC's supremacy in the decision-making process, distribution of proceeds, and over operational creditors but also called for fair treatment of all creditors.

4. Resolution Plan

If the NCLT is satisfied with the resolution plan as approved by the committee of creditors and meets the requirement under Section 30 then it shall by order approve the resolution process which is binding on the corporate debtor and its employees, members, creditors, guarantors, and other stakeholders involved in the resolution plan.

5. Time-Bound Resolution

The IBC under Section 12 mandates that CIRP shall be completed within 180 days from the date of admission of the application to initiate the process (extendable to an additional 90 days). It further provides under Section 12(3) that CIRP be mandatorily completed within 330 days failing which the tribunal will liquidation procedure.

6. Liquidation

The liquidation procedure is initiated under Section 33 under various conditions. Failure to approve a resolution plan within the stipulated period, the adjudicating authority rejecting the resolution plan, or the adjudicating authority not receiving a resolution plan among others leads to the liquidation of the company.

Challenges under CIRP

1. Delays in Resolution

Despite time-bound mechanisms, practice proves that cases often take more than 270 days mainly due to legal and procedural activities. For example, in the Jaypee Infratech Ltd [3]. Corporate Insolvency Resolution Process, operational and financial creditors frequently contested their claims, and appeals at various stages, and Supreme Court intervention including that the CIRP be restarted led to delays. Similarly, in Amtek Auto Ltd [4]. The case dragged on for more than 900 days. The complexity of claims, valuation issues, judicial delays, restarting the resolution process in some cases, and other legal complexities all lead to delays in the resolution process.

2. Judicial Overload

National Company Law Tribunal (NCLT) suffers from severe judicial congestion, with only 15 benches across the country that manage thousands of cases, the workload is overwhelming and thus reduces efficiency, leading to delays in the decision-making and ultimately eroding the confidence of stakeholders in the entire process. The standing finance committee also highlighted the need to increase NCLT benches to tackle judicial delays effectively.

3. Haircuts for Creditors

Haircuts refer to the percentage reduction that the creditors agree to on their claims. Working creditors suffer a huge percentage of their claims as observed in the CIRP of Videocon Industries Ltd. [5] in which creditors agreed to accept a 95-96% cut on their claim, a significant loss which showcases the challenges in achieving fair recovery. The procedure raises questions on the extent the resolution process facilitates creditor recovery to the optimum.

4. Small Participation of the Operational Creditors

An operational creditor does not have a voting right in the CoC, which is a major concern that came up in the recent Supreme Court judgment of Swiss Ribbons Pvt.Ltd v Union of India.[6] the interest of small creditors may be overlooked especially if they are unable to assert influence. The Supreme Court too in the above case has urged for improvements in actual treatments of operational creditors and acknowledged the need for a more inclusive approach.

5. Sustainability of Resolution Plans

Resolution plans are designed to help companies in financial distress recover by finding suitable buyers or investors. However, often these plans fail after they are approved primarily due to poor due diligence during the bidding process, execution challenges like lack of experience, operational mismatch, and regulatory or legal hurdles.

Text "CIRP Procedure" next to a damaged factory model on papers labeled "INSOLVENCY AND BANKRUPTCY," with a judge's gavel nearby.

Reforms and the Way Forward

1. Increasing Judicial Capacity

It is very important to increase the number of NCLT benches to more cities which would distribute the caseload significantly. Additionally, appointing more judges and technical members can also help reduce caseload. Leveraging technology for case management, filing, and hearing can also help streamline the process for example E-Court in arbitration.

2. Streamlining Litigation

The litigation process could be significantly streamlined with the introduction of a pre-packaged insolvency process which is a system of framework where a company and its creditors agree on a resolution plan before the formal initiation of insolvency proceedings in tribunals. Similar mechanisms have been introduced for the MSME Sector and have been largely successful and thus the RBI in its June 2023 guidelines [7] proposed reforms for applying a pre-packaged insolvency process for large corporates.

3. Enhancing Creditor Recovery

Improvement in the due diligence process to properly assess whether the proposed bidder has the financial capacity and expertise to implement the plan successfully. Encouraging more bidders ensures fair market conditions and enhances the overall credibility of the insolvency process.

4. Improving Operational Creditor Protection

Introduction of voting rights for operational creditors according to the proportion of their claims would ensure that their interest is not neglected and factored in while decision making. Even without the voting rights operational creditors should have representation in Coc to voice their concerns effectively.

5. Post-Resolution Monitoring

Mandatory post-resolution monitoring could help increase accountability and ensure that companies stick to their commitments made in the resolution plan. It involves periodic reviews and reports to track progress which helps ensure that CIRP is a success. This also helps to detect issues early on, enabling it to avoid slipping back into financial distress. A similar model is used in the United Kingdom’s Company Voluntary Agreements (CVA) which uses several mechanisms like regular reporting, adherence to the approved plan which is ensured by an appointed supervisor, and ensuring that creditors regularly get updates.

Conclusion

The Insolvency and Bankruptcy Code of 2016, has been a transformative law for the insolvency regime in India, especially through the CIRP which has revolutionised the approach towards addressing corporate financial distress. It introduced a time-bound mechanism to resolve insolvency, prioritize creditor recovery, and revive viable businesses, significantly boosting India’s ease of doing business rankings and enhancing investor confidence in general Despite its achievements, the CIRP has encountered challenges, including judicial delays, large haircuts for creditors, marginalization of operational creditors, and issues with the implementation of resolution plans. These criticisms point to the need for structural reforms, such as expanding NCLT capacity, promoting pre-packaged insolvency for larger corporates, improving due diligence processes, and ensuring equitable treatment of all creditors. Additionally, implementing post-resolution monitoring and learning from international models like the UK’s Company Voluntary Arrangement (CVA) could ensure the sustainability of resolutions. In conclusion, while the IBC has been a game-changer, addressing these issues through targeted reforms will strengthen its framework further. A more efficient and equitable insolvency regime will not only protect stakeholder interests but also position India as a global leader in corporate governance and business recovery.

References:

[1] ICICI Bank Ltd v Innoventive Industries Ltd [2017] SCC OnLine NCLT 20885 (NCLT)

[2] Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta (2020) 8 SCC 531

[3] Jaypee Infratech Ltd Interim Resolution Professional v Axis Bank Ltd (2020) 8 SCC 401.

[4] Amtek Auto Ltd Committee of Creditors v Dinkar T Venkatasubramanian (2021) 4 SCC 457

[5] Insolvency and Bankruptcy Board of India, ‘Order: CIRP of Videocon Industries Ltd’ (6 January 2022)

https://ibbi.gov.in/uploads/order/2022-01-06-092523-j5xav 8511af095c7bdb9a5f281970582528db.pdf accessed on 11 December 2024.

[6] Swiss Ribbons (P) Ltd. V. Union of India (2019) 4 SCC 17

[7] Insolvency and Bankruptcy Board of India, ‘Pre-Packaged Insolvency Resolution Process Information Brochure’ (2023)

https://www.ibbi.gov.in/uploads/whatsnew/a650764a464bc60fe330bce464d5607d.pdf accessed on 14 December 2024

Topics:

Corporate IBC 2016 Insolvency Corporate Insolvency Insolvency and Bankruptcy Code 2016 Bankruptcy CIRP Insights Corporate Insolvency Resolution Process (CIRP)