In the realm of corporate governance, the process of winding up companies has undergone significant changes over the years. Initially, the Companies Act of 1956 and, subsequently, the Companies Act of 2013 provided the framework for winding up companies. These legislative measures outlined the procedures for dissolving a company and settling its debts, but they were often seen as cumbersome and time-consuming.
In response to these challenges and to streamline the process, the Insolvency and Bankruptcy Code (IBC) was introduced in 2016. This landmark legislation brought forth a new procedure known as the Corporate Insolvency Resolution Process (CIRP). The IBC, enacted in 2016, represents a comprehensive overhaul of insolvency and bankruptcy in India. Furthermore, it sets out detailed provisions not only for the insolvency or bankruptcy of individuals and partnership firms but also for Limited Partnerships (LLPs) and companies.
In this post, we’ll dig deep into the complete Corporate Insolvency Resolution Process (CIRP).
What is the Insolvency Resolution Process (IRP)?
To put it simply, the insolvency Resolution Process, also known as the Corporate Insolvency Resolution Process (CIRP) is a procedure established under the Insolvency and Bankruptcy Code (IBC), 2016. The IBC is the key legislation governing bankruptcy and insolvency matters in India.
When a corporate debtor fails to repay their dues to creditors, the financial creditors have the authority to initiate the insolvency resolution process. To start the process, a formal application must be admitted to the National Company Law Tribunal (NCLT). Once the application is admitted by the NCLT, the assets of the company are frozen for a period of six months. During this time, the NCLT will evaluate various options to address the company’s financial distress, including debt resolution, corporate restructuring, or liquidation.
How to implement a Corporate Insolvency Resolution Process (CIRP)?
Here is a list of the steps to implement a Corporate Insolvency Resolution Process (CIRP).
- In the first step, you will need to initiate the corporate insolvency resolution process (CIRP), a creditor (either financial or operational) or the company itself can file an application with the National Company Law Tribunal (NCLT). The application must showcase that the company has failed to pay a debt exceeding Rs. 1 lakh. The NCLT is required to make a decision to admit or reject the application within 14 days. Financial creditors need to provide a default report, and operational creditors must meet specific requirements as outlined by the Insolvency & Bankruptcy Code (IBC), 2016.
- After that, once the NCLT admits the application, the corporate debtor’s board of directors is suspended, and an independent Interim Resolution Professional (IRP) is appointed. The IRP takes over the company’s management, and the existing management loses control over the company’s operations until the CIRP is completed.
- In the third step, a moratorium is imposed to protect the corporate debtor during the CIRP. It prohibits;
- The initiation or continuation of any legal proceedings against the corporate debtor.
- The transfer of its assets.
- The execution of any security interest.
- The recovery of property by owners.
- The discontinuation or termination of the supply of essential goods and services.
- In the next step, the Interim Resolution Professional gathers and verifies the claims made by the corporate debtor’s creditors. These claims are then listed and submitted to the Committee of Creditors (COC), which consists of all the corporate sector’s financial creditors. This verification process must be completed within 30 days of the CIRP commencement.
- After that, the COC appoints an independent resolution professional to manage the CIRP going forward. This professional could be the same person as the Interim Resolution Professional or a new appointee, depending on the COC’s decision.
- In the final and last step, a resolution plan for restructuring the corporate debtor must be approved by the creditors within 180 days from the start of the CIRP. The plan can be proposed by any person, management, creditors, or a third party. The Resolution Professional must ensure that the plan meets the criteria set out by the IBC. If the plan is approved, it will be implemented to address the company’s financial issues.
Documents Required to be Submitted During the IRP
Listed below are the documents required to submit during the Insolvency Resolution Process (IRP).
For Financial Creditors:
- Name of the Proposed Interim Resolution Professional.
- Record of default with evidence (eg., Information Utility Report).
- Any additional information requested by the board.
For Operational Creditors:
- Copy of the invoice or demand notice sent to the corporate debtor.
- Affidavit confirming no dispute notice from the corporate debtor.
- Certificate from the financial institution confirming non-payment.
- Report from Information Utility which confirms non-payment (if available).
- Any other proof or information as required by the central government.
For Corporate Debtors:
- Record of the company’s books of account for the relevant period.
- Information about the proposed Interim Resolution Professional.
- Special Resolution from shareholders or resolution from at least three-fourths of partners approving the application.
What Could be the Outcome of Initiating an IRP?
If you initiate an Insolvency Resolution Process (IRP), it may lead to the following outcomes.
- Debt Repayment & Legal Proceedings Halted
Once the NCLT admits that the company is in CIRP, all legal actions against it are paused, and debt repayment is put on hold during the moratorium period.
- Impact on Shareholders
Shareholders often face complete dilution of their equity, depending on the outcome of the resolution plan.
- Successful Resolution
If the Committee of Creditors (COC) approves a resolution plan, a new management team may take control of the company’s operations.
- Liquidation
If no viable resolution plan is found within the given timeframe, the NCLT may direct the resolution professional to liquidate the company.
- Creditor Recovery
Financial creditors have priority over recovery proceeds, followed by operational creditors, including government dues and employee claims.
- Management Change
Finally, the management of the company is transferred to a resolution professional for the duration of the CRP.
Final Thoughts
So, there you have it! That’s a wrap to the Corporate Insolvency Resolution Process! Remember that the Corporate Insolvency Resolution Process (CIRP) provides a structured approach to managing financial distress in companies. It facilitates debt restructuring, resolves creditor claims, and oversees the liquidation of assets. Through CIRP, companies may achieve debt repayment, experience changes in management, or continue operations under new ownership, which ensures a more organized resolution of financial challenges.
