Corporate-Led Insolvency Resolution Process: The Other Side Of The Greener Grass

INTRODUCTION

Since its inception in December 2016, the Insolvency and Bankruptcy Code (IBC) of 2016 has played a pivotal role in transforming India's insolvency landscape by establishing a time-bound, creditor-driven process for resolving insolvency cases and has facilitated to promote a healthier credit culture by balancing the interests of all stakeholders involved with a view to ensure the survival of the corporate debtor instead of its demise. However, various issues such as delayed resolution, procedural rigmaroles, amongst others, have marred its effectiveness and progress.

IBC sets out three primary resolution processes: the Corporate Insolvency Resolution Process (CIRP), the Fast-track Corporate Insolvency Resolution Process (FCIRP), and the Pre-packaged Insolvency Resolution Process (PPIRP). Each process is designed to address different levels of complexity involved in insolvency resolution. For instance, CIRP process can be initiated by a financial creditor u/s 7, an operational creditor u/s 9 and a corporate debtor u/s 10 of the Code. During this process, the entire management of the Corporate Debtor gets vested with the Resolution Professional (RP). On the other hand, the FCIRP process, is available for a certain specific category of corporate debtors such as a small company, a startup, or an unlisted company, with an aim to provide a quicker resolution in 90 days extendable by another 45 days. Now the PPIRP process (Pre-Packs) is a debtor-in-possession model, specifically designed for MSMEs and is required to be completed within 120 days. The Corporate Debtor starts by informally negotiating a basic resolution plan with creditors before formally involving the Adjudicating Authority (AA) in an attempt to salvage its organisation.

However, despite the IBC's intent to provide time-bound solutions, it has been plagued by procedural court delays, which have significantly diminished the effectiveness of the Fast-track process. In an attempt to remedy the aforesaid ills, the Insolvency and Bankruptcy Board of India (IBBI) formed an expert committee to propose a solution to fast-track the FCIRP process and propose a hybrid insolvency resolution mechanism. Accordingly, the Expert Committee led by Mr. Sudhaker Shukla (Chairman) brought out its report titled "Framework Report on the Creditor Led Resolution Approach in Fast-track Corporate Insolvency Resolution Process under the Insolvency & Bankruptcy Code, 2016" in May 2023 wherein it recommended a Creditor-Led Insolvency Resolution Process (CLRP), designed to implement a creditor-driven and out-of-court insolvency process. The Committee draws its inspiration from the insolvency regime followed in international jurisdictions such as the United Kingdom, United States, Germany, Australia, and Singapore.

The proposed CLRP would retain the essential procedural components of the CIRP, such as the appointment of Resolution Professional, Moratorium, formation of CoC, and approval of the resolution plan by the AA. However, it distinguishes itself by limiting judicial intervention to the minimum such as to approval of the resolution plan and instances of fraud or mismanagement. Moreover, the timeline for CLRP would be 150 days instead of 330 days for CIRP.

KEY HIGHLIGHTS

a) Applicability:

The CLRP process will apply to both MSME and non-MSME CDs, with criteria set by the Central Government. The minimum threshold for default for the CLRP framework has been recommended to be the same as that of CIRP i.e., INR 1 Crore and above.

b) Hybrid Mechanism

The proposed CLRP framework envisions a 'creditor-led' and 'out-of-court' initiated insolvency resolution process. Additionally, this debtor-in-possession model aims to expedite the resolution process and marks a departure from the creditor-in-control approach seen in the CIRP. The CD in CLRP is itself allowed to run the company, during the progression of CLRP, under the supervision of RP and CoC.

This framework proposes a resolution process in two stages, firstly 'Out-of-court Process' and Secondly 'Adjudicating Authority's role in assessing the Resolution Plan'.

PROCEDURES

Stage – I 'Out-of-Court Process'

Step 1 – Upon the occurrence of a default by the CD, a financial creditor or an authorized representative of financial creditors, in instances where there are multiple eligible FCs, representing no less than 51% of the total financial debt owed by the CD, shall serve a notice to the CD. This notice shall require the CD to submit a proposal for a resolution plan to address the default within 30 days from the date of service of the notice.Step 2 - After considering the reply of the CD, then FCs will appoint an RP to initiate CLRP. Step 3 - RP files an application notifying the AA and the IBBI, intimating his appointment and the initiation of CLRP, triggering the automatic limited moratorium period u/s 14(1) and 14(3) bypassing the admission process envisaged in CIRP.Step 4 – The RP will then proceed to form a CoC, wherein the process of CIRP shall apply mutatis mutandis to the proceedings under the CLRP. The RP is then required to notify the AA regarding the constitution of CoC.Step 5 – The CD shall furnish all requisite information and relevant books of accounts as may be necessary for the RP to finalize the Information Memorandum (IM). The RP shall prepare and submit the IM to the members of the CoC within 60 days from the date of commencement of the CLRP. Notwithstanding the corporate debtor shall retain control over its affairs, the corporate debtor shall refrain from managing the affairs in any manner that is prejudicial to the interests of the creditors or in a fraudulent manner.Step 6 -RP then publishes public notices intimating the 'Commencement of CLRP' and inviting claims.Step 7 – The Resolution plan shall be submitted to CoC, no less than 30 days before the expiration of the maximum permissible period for the resolution process. The CoC will thereafter approve a resolution plan by a 66% majority.

Thus, CLRP by reducing delays incentivizes the CD to cooperate with FCs for timely resolution, thereby mitigating the risk of the CD being classified as an NPA and consequently, ineligible under Section 29A of the IBC. Non-cooperation by the CD may incur penal repercussions, allowing FCs to convert the CLRP into CIRP, by applying to the AA. Additionally, the corporate debtor's involvement has been greatly increased under this framework. While resolution plans can be invited from external parties, the corporate debtor retains the right to match the best plan received through a "challenge mechanism."

Stage II: Role of Adjudicating Authority

The role of AA comes into play, when the RP makes an application before the AA to seek approval for the resolution plan approved by the CoC. In the event the resolution plan is rejected by AA, the CLRP may be terminated, and/or the CIRP may be initiated.

CONCLUSION

In conclusion, this proposed hybrid framework aims to significantly enhance transparency and cooperation from CDs while establishing deterrents to discourage non-compliance. One of its key objectives is to streamline the CIRP by reducing the resolution period from the current 330 days to just 150 days, facilitating a quicker resolution of insolvency of the corporate debtor thereby preserving and maximising the value of its distressed assets.

However, despite the promises, several concerns prevail within the draft regulations which could impede its effective implementation:

Firstly, stipulating a minimum threshold of INR 1 Crore similar to that in CIRP could lead to confusion among FCs regarding which cases should proceed under the CLRP versus the CIRP. This ambiguity may grant FCs excessive leeway in decision-making, complicating the resolution landscape.

Secondly, PPIRP which is initiated by the Corporate Debtor, the CLRP, as currently structured, is commenced by FCs. As the CD faces the prospect of losing control over its business in CLRP as opposed to PPIRP, the CD may lack the incentive to actively engage in the resolution process. Moreover, the CD may lack the necessary resources to compete with resolution plans submitted by larger companies and could potentially lose control of their organisation.

Thirdly, the requirement for NCLT's approval for the imposition of a moratorium could itself result in a delay at the very beginning of the commencement of CLRP. Such delays could critically undermine the proposed timelines for completing the CLRP thereby defeating the purpose of reworking the FCIRP yet again. Hence, it is vital to address these concerns so that the stated objectives of CLRP are achieved and it doesn't become a non-starter.

The above article is authored by Jyoti Kumar Chaudhary, Sumit Jay Malhotra, Nikita Sharma.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. The article was originally published in Mondaq(https://www.mondaq.com/article/1541084/corporate-led-insolvency-resolution-process-the-other-side-of-the-greener-grass?msg=15)