What is Corporate Insolvency Resolution Process : A Guide

Facing financial troubles in business can lead to sleepless nights, especially when debts start piling up with no apparent way out. It's a common scenario for many business owners and directors who struggle to keep their company afloat amidst financial distress.

One beacon of hope is understanding what is corporate insolvency resolution process, a structured approach aimed at resolving the insolvency issues companies face today.

The Insolvency and Bankruptcy Code (IBC) 2016 provides this lifeline. It allows financially troubled companies a chance to recover. Our blog explains the steps involved in initiating the Corporate Insolvency Resolution Process (CIRP), understanding the roles various stakeholders play, and what happens if a resolution plan fails.

This guide aims to simplify these procedures, making them easier to understand and apply. Keep reading for insights that could save your business.

What is the Corporate Insolvency Resolution Process?

The Corporate Insolvency Resolution Process (CIRP) is a legal procedure highlighted by the Insolvency and Bankruptcy Code (IBC) with the objective of resolving a corporate debtor's financial distress.

The process enables the evaluation of the corporate debtor's assets and liabilities, managed by a selected insolvency professional. This stage ensures that creditors can retrieve dues in an orderly manner while making efforts to resolve the operational debt and maintain the company's operational status.

Essential terms like 'resolution plan', 'insolvency professional', and 'committee of creditors' carry notable importance throughout this process. A resolution plan prepared within CIRP aims to restructure the corporate debtor's finances, thus enabling it to settle its debts.

An insolvency professional supervises these proceedings, ensuring everything is compliant with the IBC guidelines. Simultaneously, a committee of creditors determines the debtor's outcome based on proposed resolution plans.

Working through CIRP requires collaboration among multiple stakeholders to accomplish a balance between debt recovery and business continuity.

Now, it's time to understand how someone starts this crucial process.

Understanding Corporate Insolvency

Corporate insolvency arises when a company finds itself unable to meet its debts as they mature. This often instigates a well-organised operation referred to as the Corporate Insolvency Resolution Process (CIRP).

In this phase, measures are put into place to alleviate the company's financial woes in a manner that optimises returns for creditors and shareholders. Such steps are vital in handling the aftermath of insolvency, ensuring equitable conduct, and striving for healing or systematic dissolution.

Financial difficulties can forcefully impact any business, unsettling operations and endangering jobs. It prompts an immediate demand for action under regulations like the Insolvency and Bankruptcy Code (IBC) in India.

The IBC delineates explicit procedures for activating CIRP, which involves the submission of a petition to the National Company Law Tribunal by either fiscal creditors or the corporate debtors themselves.

The process is administered carefully to establish equilibrium between various stakeholders involved - protecting employees' rights and addressing creditors' claims - with the objective of either saving the business through restructuring or arranging for its liquidation if resolution is not achieved.

The Role of the Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) plays a crucial role in the process of corporate insolvency. It provides a legal framework to resolve insolvencies in a time-bound manner. The code aims to consolidate all laws related to insolvency and bankruptcy and protect the interests of small investors and creditors.

It ensures that businesses have an efficient way to restructure or liquidate, enabling better credit flow in the economy.

Under IBC, financial institutions, including banks, can recover their dues faster from defaulting companies. This act also facilitates easier resolution processes for distressed businesses by appointing qualified resolution professionals.

These experts manage the debtor company's assets and run their operations smoothly during the resolution period. Furthermore, IBC maintains parity among all stakeholders involved, ensuring fair treatment when distributing assets from insolvent firms.

Key Terms in the Corporate Insolvency Resolution Process

Understanding corporate insolvency requires awareness of a few pivotal terms that often come into play during the insolvency resolution process irp it. One vital term is the "resolution applicant," who refers to any individual or entity proposing a resolution plan for the debtor's insolvency to rejuvenate the company.

Another vital element is the "Interim Resolution Professional," who is assigned in the early stages of the Corporate Insolvency Resolution Process (CIRP) to oversee the debtor's assets and operations effectively.

This appointment of a resolution professional plays a substantial role in ensuring business continuity.

The Insolvency and Bankruptcy Code (IBC) establishes a systematic route for resolving corporate distress, guaranteeing fairness and transparency.

Terms like "moratorium" and "liquidation value" are equally significant. A moratorium period commences with the filing of an application under IBC, pausing all legal proceedings against the company and offering a reprieve for restructuring initiatives.

The liquidation value represents what is left if the sale of assets is deemed necessary—an eventuality that everyone strives to prevent by identifying a successful resolution plan.

These ideas are part of our discussions on how businesses can manage these challenging situations for recovery.

How to Initiate the Corporate Insolvency Resolution?

Launching the Corporate Insolvency Resolution Process (CIRP) demands an understanding of its structure and adhering to specific legal steps. This procedure assists in settling corporate debtor defaults, ensuring efficient recovery of amounts by creditors.

1. Recognise a default: The procedure commences once a corporate debtor misses a due payment. According to the Insolvency and Bankruptcy Code (IBC), creditors can initiate CIRP for a minimum default of INR 1 lakh, subject to change.
2. Classify the creditor: Creditors are divided into financial or operational categories. Financial creditors provide funds for interest, and operational creditors supply goods or services, resulting in unpaid invoices.
3. Assemble documents: Creditors need to compile all pertinent papers such as default proof, loan agreements, debtor's financial statements, and any substantial evidence supporting their claim.
4. Lodge a petition: Creditors present their application to start CIRP to the National Company Law Tribunal (NCLT). The application enlists default details and requests for reimbursement.
5. Remit the fee: Application filing necessitates a prescribed fee payment along with the submission to guarantee uninterrupted processing.
6. Assignment of an Interim Resolution Professional (IRP): Upon application approval, NCLT assigns an IRP to oversee the debtor's assets and operations during CIRP. This individual supersedes the board of directors in management.
7. Public declaration: The IRP announces the commencement of CIRP publicly, asking other creditors for claims within fourteen days from the insolvency commencement date.
8. Committee formation: The IRP forms a Committee of Creditors (CoC), incorporating all the corporate debtor's financial creditors. Operational creditors have restricted representation unless their collective dues surpass ten per cent of total debts.
9. CoC congregation: The committee convenes to deliberate on resolutions and determine the next steps for reviving or liquidating the debtor company based on majority votes.
10. Resolution plan submission: Potential resolution applicants propose plans describing their default resolution strategy and company operation revival while ensuring maximum value for creditors.
11. Plan assessment and sanction: The CoC evaluates proposed plans against specific criteria to ensure feasibility and viability for extended survival post-CIRP process.
12. NCLT sanction is necessary before executing any plan involving restructuring or sale approved by a 66% voting share of financial creditors in the CoC.

Effectively initiating CIRP can aid companies to return to financial stability or alternatively guide them to liquidation if resolution attempts are unsuccessful. The journey includes rigorous phases aimed at deriving enduring solutions for beleaguered entities through synchronised efforts among all stakeholders participating in Corporate Insolvency Resolution Process.

Steps to Initiate CIRP Against a Corporate Debtor

Initiating the Corporate Insolvency Resolution Process (CIRP) can be a significant step for a financial institution, creditors, operational creditors, or the corporate debtor themselves. The process is detailed and follows specific steps laid out by the Insolvency and Bankruptcy Code (IBC).

1. A financial creditor starts by applying with the National Company Law Tribunal (NCLT). They need proof of default from the corporate debtor.
2. Operational creditors must first send a demand notice to the corporate debtor. This notice seeks to recover unpaid dues.
3. If there's no response from the debtor within 10 days, operational creditors can then file their application to initiate CIRP.
4. Corporate debtors also have the option to initiate CIRP against themselves. They must provide proof of their inability to pay debts.
5. Every application needs evidence of default, which might include records from an information utility or a judgment decree stating that a default has occurred.
6. An affidavit and fee accompany all applications submitted to NCLT. The affidavit confirms all details in the application are accurate.
7. On receiving an application, NCLT has 14 days to accept or reject it. Acceptance moves forward with appointing an interim resolution professional.
8. The appointed interim resolution professional takes charge of the company's operations. Their role is crucial in managing affairs neutrally.

Following these steps sets off a series of actions focusing on resolving insolvency through either a revival plan or liquidation if resolution fails.

Requirements for Financial Creditors and Corporate Debtors

Upon choosing to commence the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, both financial creditors and corporate debtors need to fulfil certain prerequisites.

Financial creditors are required to furnish evidence of default committed by the corporate debtor. This would typically involve proof such as unsettled invoices or violation of financial contracts.

The overdue amount should meet or surpass the minimum limit as per the law, which is currently set at one lakh Indian rupees. In contrast, corporate debtors are obliged to maintain an accurate account of their financial dealings and obligations, along with compiling a thorough list of assets.

Moreover, corporate debtors are mandated to work in complete harmony with the assigned resolution professional during the CIRP process. They need to share indispensable documents relating to their activities and financial matters promptly.

Also, suppose they plan to propose a resolution plan for the Committee of Creditors' review. In that case, they have to make sure it adheres strictly to all conditions listed in the Insolvency and Bankruptcy Code (IBC).

Both parties' involvement is crucial to approaching a just and efficient resolution that advantages all stakeholders involved, particularly in terms of creditor recovery financial creditors.

Filing a Petition with the National Company Law Tribunal

After understanding the requirements for financial creditors and corporate debtors, the next step is to file a petition with the National Company Law Tribunal (NCLT). This action starts the Corporate Insolvency Resolution Process (CIRP).

The petitioner needs to prepare an application as outlined under the Insolvency and Bankruptcy Code (IBC). They must include evidence of default by the creditor claims the corporate debtor. The default could involve unpaid debts or financial obligations not met.

The NCLT then examines this application to initiate CIRP. If it meets all legal criteria, they approve it, marking the official start of insolvency proceedings against the troubled company.

Key stakeholders such as creditors, employees, and shareholders receive notices about this development. This step ensures that everyone involved understands their rights and duties during CIRP under IBC guidelines.

What are the Stages of the Corporate Insolvency?

The stages of corporate insolvency begin with the appointment of an interim resolution professional. This expert steps in to take control of the debtor company's operations, making crucial decisions on behalf of the business.

They play a significant role by maintaining its operations and safeguarding its assets during this turbulent period.

Next, we form a committee of creditors, comprising mainly financial creditors of the corporate. This body has the power to make significant decisions affecting the insolvency process. It reviews various resolution plans submitted by potential resolution applicants, aiming for a revival rather than liquidation.

A successful resolution plan breathes new life into distressed companies, offering them a second chance at success.

The Role of the Interim Resolution Professional

An Interim Resolution Professional (IRP) assumes responsibility for the debtor's operations immediately following the commencement of the Corporate Insolvency Resolution Process. This professional plays a pivotal role in supervising the corporate debtor's assets and managing its daily functions.

They strive to maintain the company's functionality while safeguarding all the financial creditors and creditors' rights during this time. Their tasks comprise gathering all financial data regarding the debtor, confirming creditors' claims, and preserving the company's records.

The IRP also establishes a Committee of Creditors (CoC), which contributes substantially to determining the corporate debtor's future. This committee appraises resolution plans submitted by various parties keen on revitalising the former company's management.

In essence, they serve as a link connecting the corporate debtor and its creditors, ensuring transparency and fairness throughout this procedure. The efficacy of a resolution plan often depends on how competently an IRP can handle these duties while moving through insolvency or bankruptcy proceedings within precise timelines detailed by legislation.

Formation of the Committee of Creditors

The formation of the Committee of Creditors is a critical step in managing a corporate debtor's insolvency under the Insolvency and Bankruptcy Code (IBC). This committee consists mainly of financial creditors who have claims against the corporate debtor.

They play a pivotal role in making decisions regarding the future of the insolvent company, including evaluating and approving resolution plans submitted by prospective resolution applicants.

The aim is to ensure that stakeholders' interests are fairly represented and protected during the insolvency process.

The appointed proposed interim resolution professional collects all claims made by creditors and oversees forming this committee swiftly after the initiation of insolvency proceedings. This action ensures that measures like moratoriums on litigation and asset disposals by the corporate debtor get enforced without delay, protecting business operations.

Following this, attention shifts toward the submission and evaluation of resolution plans, aiming for rehabilitation or orderly liquidation if required.

Submission and Evaluation of the Resolution Plan

Resolution applicants must submit their resolution plan to the insolvency professional, who then evaluates these plans against specific criteria. This process includes checking if the plan meets all requirements set by the Insolvency and Bankruptcy Code (IBC) and covers the corporate debtor's financial affairs comprehensively.

Plans should aim to revive the insolvent company while ensuring fair treatment to all creditors.

After evaluation, as specified by the board, the insolvency professional presents approved plans to the creditors' committee. They vote on them, requiring a special resolution from at least three-fourths of voting shares for approval.

A successful plan binds all parties involved, ensuring operations of the corporate debtor can resume under new management or structure.

Next up is understanding who can step forward as a resolution applicant in this critical process.

Who Can Be a Resolution Applicant?

A resolution applicant is instrumental in executing the corporate insolvency resolution procedure. This party submits a resolution scheme focused on revitalising a financially distressed company.

The eligibility guidelines are pretty inclusive, offering an opportunity to financial creditors, operational creditors, and even the corporately indebted to propose a strategy. Furthermore, stakeholders such as holders of employee state insurance, debenture holders, and others who can gain from the company's recovery are also encouraged to take the initiative.

Every stakeholder possessing a feasible scheme is afforded a chance to aid in improving the situation of a financially distressed company.

The application process mandates the creation of an extensive plan adhering to certain essentials set by the Insolvency and Bankruptcy Board of India (IBBI). It is required to address how it plans to settle outstanding debts by the corporately indebted while ensuring its sustenance post-resolution.

Exclusively, the schemes sanctioned by the committee of creditors become enforceable on all involved parties, signifying a vital step in preventing companies from dissolution.

Eligibility Criteria for Prospective Resolution Applicants

Submitting a resolution plan entails that prospective resolution applicants fulfil certain criteria to certify that they can offer feasible solutions for the corporate debtor. These individuals or entities must not be undischarged bankrupts and should not have any account categorised as non-performing assets (NPAs) for more than one year unless they have sorted their overdue payments.

Furthermore, they must not be disqualified by any law from holding leadership roles in firms. This ensures participation in the insolvency process is limited to financially stable and reputable parties.

Likewise, applicants must show a thorough comprehension of the business operations of the corporate debtor and offer a plan that feasibly could restore its financial state. The Insolvency and Bankruptcy Code (IBC) makes this obligatory to protect the interests of all stakeholders involved - the corporate debtor's creditors, its employees, and other parties having an interest.

Following this, we discuss how these resolution plans are put forth for approval.

Process to Submit a Resolution Plan

Submitting a resolution plan is a critical step in the Corporate Insolvency Resolution Process (CIRP). This process allows potential resolution applicants to propose viable recovery strategies for the distressed company. Here's how to go about it:

1. Evaluate the financial situation of the corporate debtor. Understand their assets, liabilities, and overall business model.
2. Check your eligibility as a resolution applicant against the criteria set by the Insolvency and Bankruptcy Code (IBC).
3. Obtain detailed information about the debtor from the interim resolution professional. This includes financial records and operational details.
4. Prepare a comprehensive resolution plan. Your plan should address how to resolve the debtor's insolvency, ensuring viability and compliance with laws.
5. Ensure your plan respects the rights of all stakeholders involved, including creditors of the corporate debtor and its employees.
6. Include details on how you will manage insolvency resolution process costs within your plan.
7. Submit your proposal before the deadline set by the Committee of Creditors (CoC).
8. Attend meetings with the CoC to present your plan and answer any queries they might have.
9. Revise your plan, if necessary, based on feedback from these meetings or new information that emerges.
10. Wait for approval of your resolution plan by a 66% vote from the CoC.
11. If approved, work closely with authorities to implement your plan as per norms outlined in an order approving this phase.
12. Monitor progress regularly and make adjustments as needed to ensure successful revival of the corporate debtor.

Approval and Binding Nature of the Resolution Plan

After submission, the National Company Law Tribunal (NCLT) reviews the resolution plan. This step is critical in the Corporate Insolvency Resolution Process. If the NCLT finds that the first proposed interim resolution plan meets all legal requirements and serves the best interest of creditors, it issues an order approving the resolution plan.

Once approved, this plan becomes binding on all parties involved including corporate debtor, creditors (both financial and other operational creditor), employees, and other stakeholders. It outlines how to pay debts by corporate debtor as stipulated in its terms ensuring a way forward for financially distressed businesses to recover while maintaining fairness to creditors' claims.

What Happens if the Resolution Plan Fails?

If the revival strategy for buoying a corporate debtor does not gain approval from the central government, the subsequent action is the dissolution of the corporate entity. This procedure involves auctioning off assets to repay creditors.

The Insolvency and Bankruptcy Board carries an essential role here, supervising the process to ensure equitability and legality throughout the dissolution phase. Creditors may incur losses if the assets do not offset all debts, resulting in a notable influence on their financial recuperation.

The funds from the sold assets are directed to settling claims made by creditors in a hierarchical sequence established under insolvency laws. Worker's claims often precede those of unsecured creditors, ensuring protection for workers' outstanding payments.

Despite initiatives for debt repayment and revival through resolution plans, failure progresses immediately to this stage, seeking to maximise the value from the remaining resources of the corporate debtor.

Liquidation of the Corporate Debtor

Liquidation marks the final step in the corporate insolvency resolution process when a plan to revive the company fails. The resolution professional, following approval from the Committee of Creditors (CoC), moves to liquidate the corporate debtor.

This action involves selling assets owned by the corporate debtor. Funds raised from these sales pay off creditors as per their priority set under the Insolvency and Bankruptcy Code (IBC).

Employees' claims also get addressed during this phase, ensuring they receive unpaid wages.

Assets of the corporate debtor undergo valuation before sale, determining their liquidation value. The resolution professional manages this process efficiently, aiming to maximise returns for all stakeholders involved.

Creditors with security interests over assets will have those settled first according to legal hierarchies established in corporate law and IBC guidelines. This systematic approach ensures an orderly winding up of corporations that cannot meet their debt obligations through restructuring or revival plans.

Impact on the Assets of the Corporate Debtor

Moving from the phase of liquidation to the consequences on assets showcases a pivotal shift. The assets of the corporate debtor undergo significant changes during this process. Assets get sold off to repay creditors, affecting ownership and balance sheets drastically.

This change is governed by the insolvency and bankruptcy board, ensuring that asset distribution follows legal protocols.

The sale impacts not just physical assets but also intangible ones like intellectual property and market position. Creditors submit claims against these assets, prioritised based on their financial stakes and security interests.

Managers of the corporate debtor see their control diminish as resolution professionals take over to liquidate and distribute assets according to approved plans. This period marks a critical junction in attempting creditor recovery, especially when there is an invoice demanding payment that cannot be settled due to insolvency. Financial creditors and corporate restructuring for entities facing insolvency or bankruptcy are critical considerations during this phase.

Role of the Insolvency and Bankruptcy Board

Following the discussion on the impact assets of a corporate debtor undergo during insolvency, the Insolvency and Bankruptcy Board plays a crucial role in this scenario. This body oversees the entire process of insolvency or bankruptcy, ensuring that it runs according to established protocols.

It has the authority to regulate professionals involved in resolving insolvencies, and companies can act as liquidating entities if necessary.

The board makes sure that all proceedings follow the procedure laid out under the Insolvency and Bankruptcy Code (IBC). By doing so, it upholds fairness and transparency throughout the process.

The involvement of this board is vital for maintaining order within financial systems, mainly when dealing with insolvency resolution or liquidation phases.

Conclusion

Business owners, company directors, and financial professionals hold a crucial position in directing the corporate insolvency resolution procedure. This procedure, supported by the Insolvency and Bankruptcy Code (IBC), offers a structured route for resolving financial distress.

It assures that companies can either recover to operational health or go through an unbiased liquidation process. Cooperation with capable resolution professionals is vital to preparing an approved resolution plan.

The achievement of this endeavour depends on providing a practical resolution plan within specified timelines. If the plan fails, liquidation becomes the following phase under IBC protocols.

Hence, every stakeholder from financial creditors to operational creditors must actively engage in each stage to protect their interests while aiming for the reestablishment of the corporate debtor or realising assets efficiently during liquidation.