Corporate Insolvency Resolution Process

Corporate financial distress can have significant implications for stakeholders, from employees to creditors, and even the economy at large. To address such situations, India introduced the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016. CIRP provides a structured framework to resolve the financial woes of companies while balancing the interests of all parties involved. In this article, we will explore the meaning, process, and impact of CIRP in detail.

The Corporate Insolvency Resolution Process (CIRP) is a legal mechanism under the IBC, 2016, designed to resolve the insolvency of financially distressed companies. Insolvency occurs when a company is unable to meet its financial obligations to creditors. CIRP aims to either revive the company through debt restructuring or liquidate its assets in an orderly manner to repay creditors.

The process is initiated by filing an application with the National Company Law Tribunal (NCLT). It can be triggered by creditors (financial or operational) or the company itself. Once admitted, the NCLT appoints a Resolution Professional (RP) to oversee the process, which includes assessing claims, managing the company’s assets, and facilitating the resolution plan. The entire process is time-bound, with a maximum duration of 330 days, including extensions.

To initiate CIRP, a set of documents must be submitted to the NCLT. These documents vary depending on whether the application is filed by a financial creditor, operational creditor, or the company itself. Below is a general list:

For Financial Creditors:

• Application form as per the IBC.
• Evidence of default, such as loan agreements, bank statements, or financial records.
• Proof of the creditor’s claim, including invoices, demand notices, or legal agreements.
• Authorisation documents for the person filing the application on behalf of the creditor.

For Operational Creditors:

• Demand notice or invoice demanding payment.
• Proof of default, such as bank statements or correspondence with the debtor.
• A copy of the contract or agreement with the corporate debtor.

For Corporate Debtors (Company):

• Board resolution authorising the filing of the application.
• Financial statements for the last two years.
• Details of creditors, including financial and operational creditors.
• A declaration regarding the company’s insolvency.

It is crucial to ensure that all documents are complete and accurate to avoid delays in the process.

The CIRP follows a structured and time-bound process, ensuring transparency and efficiency. Here is a detailed step-by-step guide:

1. Filing of application:
   The process begins with the filing of an application with the NCLT by a financial creditor, operational creditor, or the corporate debtor itself. The application must include all necessary documents and evidence of default.
2. Admission by NCLT:
   Once the application is reviewed, the NCLT decides whether to admit or reject it. If admitted, the CIRP officially commences.
3. Moratorium period:
   Upon admission, the NCLT declares a moratorium, halting all legal proceedings, debt recovery actions, and asset transfers against the company. This ensures the company’s assets are preserved during the process.
4. Appointment of Resolution Professional (RP):
   The NCLT appoints an RP, who takes control of the company’s management and operations. The RP’s responsibilities include verifying claims, managing assets, and facilitating the resolution plan.
5. Formation of Committee of Creditors (CoC):
   The RP forms a CoC comprising financial creditors. The CoC plays a crucial role in evaluating and approving the resolution plan.
6. Invitation for resolution plans:
   The RP invites resolution plans from potential bidders or investors interested in reviving the company.
7. Approval of resolution plan:
   The CoC evaluates the submitted plans and selects the one that offers the best outcome for creditors. The approved plan is then submitted to the NCLT for final approval.
8. Implementation or liquidation:
   If the resolution plan is approved, it is implemented under the supervision of the RP. If no viable plan is approved within the stipulated time, the company proceeds to liquidation.

The introduction of CIRP has had far-reaching implications for India’s corporate landscape. Below are some key impacts:

1. Improved creditor recovery rates

CIRP has streamlined the process of debt recovery, ensuring creditors receive a fair share of the proceeds. As per reports, recovery rates under the IBC are significantly higher compared to previous mechanisms.

2. Revival of distressed companies

By encouraging restructuring and resolution over liquidation, CIRP has enabled many companies to regain financial stability and continue operations. This has helped preserve jobs and protect the interests of stakeholders.

3. Strengthened investor confidence

The transparent and time-bound nature of CIRP has bolstered investor confidence in India’s corporate governance framework. It has made India a more attractive destination for foreign investments.

4. Reduced non-performing assets (NPAs)

CIRP has played a pivotal role in reducing NPAs in the banking sector by providing a mechanism to resolve bad loans efficiently.

5. Challenges and criticisms

While CIRP has achieved notable success, it is not without challenges. Delays in resolution, lack of adequate infrastructure, and misuse of the process are some of the issues that need to be addressed for its continued success.

Implementing CIRP requires a clear understanding of the legal framework and procedural requirements. Here are the key steps to implement CIRP:

• Understand eligibility: Ensure that the company meets the criteria for insolvency under the IBC.
• Prepare documentation: Gather all necessary documents, including evidence of default and financial records.
• File application with NCLT: Submit the application along with supporting documents to the NCLT.
• Engage professionals: Appoint experienced professionals, such as insolvency professionals and legal advisors, to guide the process.
• Follow compliance: Adhere to all legal and regulatory requirements throughout the process.

The Corporate Insolvency Resolution Process (CIRP) is a transformative step in India’s insolvency framework, offering a structured approach to resolving financial distress. Whether you are a creditor or a company facing insolvency, understanding CIRP is crucial for navigating the process effectively. For more insights on financial topics like the ex-dividend date or the role of a stockholder, visit Bajaj Finserv’s resource hub. To start your investment journey, consider opening a Demat account with Bajaj Finserv today.

Investments in securities markets are subject to market risks. Please read all scheme-related documents carefully before investing.
Past performance is not indicative of future returns.
Bajaj Broking does not provide investment advisory services.