This article is written by Ruchita Ishwar Chhajed , BLS LLB , Thakur Ramnarayan College of Law during his/her internship at LeDroit India.
Keywords
Corporate Insolvency, Insolvency and Bankruptcy Code, CIRP, NCLT, resolution process, liquidation, financial creditors, operational creditors.
Abstract
The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, revolutionized India’s insolvency framework. By ensuring a time-bound resolution, CIRP promotes corporate revival and asset maximization. With mechanisms for
creditors, insolvency professionals, and tribunals, CIRP aims to balance stakeholder interests. This article explores key features, challenges, and case laws surrounding CIRP, offering critical insights into its effectiveness in reshaping India’s financial landscape.
Introduction
The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) was enacted to address the growing concerns related to the insolvency and bankruptcy framework in India. It was designed to consolidate and amend laws relating to the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. The objective of the IBC is to promote entrepreneurship, ensure the availability of credit, and balance the interests of all stakeholders while maximizing the value of assets.
Before the IBC, India lacked a comprehensive insolvency framework, leading to delays, inefficiencies, and creditor dissatisfaction. The introduction of CIRP under the IBC aimed to resolve these issues by focusing on a structured, time-bound, and stakeholder-driven process for insolvency resolution.
Key Features of CIRP
1. Trigger Mechanisms CIRP can be initiated by financial creditors, operational creditors, or corporate debtors upon default of ₹1 crore or more. This threshold ensures that only significant defaults enter the insolvency framework.
2. Role of the Adjudicating Authority The National Company Law Tribunal (NCLT) acts as the adjudicating authority for corporate insolvency matters, ensuring due process and timely resolution.
3. Moratorium Period Under Section 14 of the IBC, a moratorium is imposed to halt legal proceedings, prevent asset alienation, and allow restructuring efforts without external pressures.
4. Committee of Creditors (CoC) The CoC, comprising financial creditors, is pivotal in assessing and approving resolution plans. Decisions are made by a majority vote of 66%.
5. Insolvency Professionals Insolvency Resolution Professionals (IRPs) manage the debtor’s operations, safeguard assets, and ensure compliance with the CIRP process.
6. Time-bound Resolution The IBC mandates a resolution process to be completed within 180 days, extendable by 90 days. This ensures swift decision-making and minimizes delays.
Initiation of CIRP
1. By Financial Creditors Financial creditors can file an application under Section 7 of the IBC upon a payment default. The landmark case of Innoventive Industries Ltd. v. ICICI Bank established the supremacy of financial creditors in initiating CIRP.
2. By Operational Creditors Operational creditors must issue a demand notice to the corporate debtor before filing an application under Section 9. The case of Mobilox Innovations v. Kirusa Software clarified the scope of disputes and procedural requirements for operational creditors.
3. By Corporate Debtors Corporate debtors facing insolvency can voluntarily initiate CIRP under Section 10, allowing proactive restructuring efforts.
Role of the NCLT in CIRP
1. Admission and Rejection of Applications The NCLT ensures that applications meet statutory requirements and determines the validity of default claims.
2. Appointment of Insolvency Professionals Upon admitting a case, the NCLT appoints an IRP to take control of the debtor’s operations and initiate the resolution process.
3. Approval of Resolution Plans The NCLT evaluates CoC-approved resolution plans to ensure compliance with IBC provisions.
Resolution Plan
1. Essentials of a Resolution Plan A resolution plan must:
o Provide for payment of insolvency costs and operational creditors. o Ensure compliance with applicable laws.
o Be viable and implementable.
2. Approval Process The CoC evaluates and approves resolution plans by a majority vote. Approved plans are submitted to the NCLT for final approval.
3. Case Study:
Case Citation: Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 Court: Supreme Court of India
Judgment Date: January 25, 2019
Bench: Chief Justice Ranjan Gogoi, Justice R. F. Nariman, Justice R. Subhash Reddy, Justice M. R. Shah, and Justice B. R. Gavai
Case Summary:
In the case of Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court dealt with the constitutional validity of certain provisions of the Insolvency and Bankruptcy Code (IBC), 2016. The petitioners, including Swiss Ribbons Pvt. Ltd., challenged the provisions on the grounds that they violated Articles 14 (right to equality) and 19 (freedom of trade and business) of the Indian Constitution.
The main issue before the Court was whether the provisions of the IBC, which made it mandatory for creditors to initiate the insolvency process, particularly in the context of “insolvency resolution” and the “decision-making process” at the committee of creditors (CoC), were constitutionally valid.
The Court upheld the constitutional validity of the Insolvency and Bankruptcy Code, asserting that it was a beneficial law aimed at economic and financial reforms. It emphasized the significance of the Code in ensuring timely resolution of insolvency proceedings, safeguarding economic stability, and promoting a business-friendly environment. The Court reasoned that the provisions of the IBC, which allow financial creditors to have a dominant role in the decision-making process, did not violate the constitutional principles of equality or fairness.
Key Points:
1. The Court observed that the Code provided an effective mechanism for resolution of insolvency, which was essential for economic reforms.
2. It upheld the role of the committee of creditors in insolvency proceedings, even though this gave more weight to financial creditors than operational creditors.
3. The Court also examined whether the provisions of the Code violated the right to equality or caused arbitrariness, ultimately finding no violation.
The judgment affirmed the legitimacy of the Insolvency and Bankruptcy Code and its provisions, thereby strengthening the legal framework for insolvency resolution in India.
Essar Steel India Ltd.
Case Citation: Essar Steel India Ltd. v. State Bank of India, (2019) 8 SCC 41 Court: Supreme Court of India
Judgment Date: November 15, 2019
Bench: Chief Justice Ranjan Gogoi, Justice R. F. Nariman, Justice M. R. Shah Case Summary:
The Essar Steel India Ltd. case dealt with the interpretation of provisions related to the Insolvency and Bankruptcy Code (IBC), particularly concerning the role of the Committee of Creditors (CoC) and the distinction between financial and operational creditors in the insolvency resolution process.
Essar Steel India Ltd., a steel manufacturing company, had been undergoing insolvency proceedings under the IBC since 2017. The main issue was whether the decision of the CoC, which was dominated by financial creditors, regarding the approval of a resolution plan, was subject to judicial review, and if the treatment of operational creditors under the plan was justified.
In this case, the National Company Law Tribunal (NCLT) had approved a resolution plan submitted by ArcelorMittal, a potential bidder for Essar Steel. However, the operational creditors objected to the treatment of their claims in the resolution plan, which had been given a relatively lower priority as compared to the financial creditors. The matter was escalated to the Supreme Court.
The Supreme Court, in its judgment, ruled in favor of ArcelorMittal’s resolution plan and held that:
1. Role of CoC: The Court emphasized that the decision of the CoC, which was made with a majority vote of the financial creditors, should generally not be interfered with, unless there was a manifest injustice or arbitrariness.
2. Priority of Financial Creditors: The Court upheld the preferential treatment given to financial creditors, recognizing their dominant role in the resolution process. The Court reaffirmed that the IBC framework treats financial creditors differently from operational creditors, as financial creditors have a larger stake in the recovery process.
3. Judicial Review: The Court stated that judicial review of the CoC’s decision is limited, and only in cases where there is a manifestly illegal or irrational decision can the Court interfere.
4. Operational Creditors’ Rights: While the Court acknowledged the rights of operational creditors, it ruled that they did not have a right to demand an equal or higher recovery than what was offered in the resolution plan, as long as it complied with the requirements under the IBC.
Key Points:
1. The judgment reinforced the central role of financial creditors in the insolvency process under the IBC.
2. It emphasized the limited scope for judicial intervention in the decision-making process of the CoC.
3. The ruling clarified the priority given to financial creditors in the distribution of assets, as set out in the IBC.
4. The decision established that operational creditors, though important, have a subordinate claim when compared to financial creditors under the Code.
This judgment was significant in strengthening the insolvency resolution process and clarified the role of various creditors under the IBC framework.
Liquidation Process
1. Triggers for Liquidation Liquidation is initiated if:
o No resolution plan is approved within the stipulated timeframe.
o The CoC decides to liquidate.
2. Role of Liquidator The appointed liquidator takes over the debtor’s assets, oversees liquidation proceedings, and distributes proceeds as per the priority waterfall under Section 53.
3. Asset Distribution
o Insolvency costs have the highest priority.
o Secured creditors and workmen dues follow.
o Equity holders rank last.
Judicial Developments
1. Swiss Ribbons Pvt. Ltd. v. Union of India (2019) The Supreme Court upheld the constitutional validity of the IBC, emphasizing its objective to balance the interests of creditors and debtors.
2. Essar Steel India Ltd. v. Satish Kumar Gupta (2020) This case reinforced the CoC’s role in approving resolution plans, ensuring a fair and equitable resolution process.
3. Recent Judgment: Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022) The Supreme Court recognized the discretionary power of the NCLT in admitting insolvency applications, ensuring flexibility in decision-making.
Challenges in CIRP
1. Procedural Delays Despite statutory timelines, CIRP often faces delays due to litigation and administrative inefficiencies.
2. Low Recovery Rates Recovery rates under CIRP average around 40%, raising concerns about the efficiency of the resolution framework.
3. Lack of Bidders Attracting viable resolution applicants remains a challenge, especially for distressed sectors.
Recent Reforms and Developments
1. Pre-packaged Insolvency Resolution Process (PIRP) Introduced for MSMEs, PIRP offers a faster and debtor-friendly resolution mechanism.
2. Cross-border Insolvency Proposed amendments aim to align India’s insolvency framework with the UNCITRAL Model Law on Cross-Border Insolvency.
3. Threshold for Defaults The default threshold for initiating CIRP has been revised to ₹1 crore, reducing frivolous cases.
Conclusion
The Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code (IBC) has significantly transformed India’s insolvency landscape. By prioritizing resolution over liquidation, CIRP ensures corporate revival and maximization of asset value. Despite challenges like procedural delays and low recovery rates, landmark judgments such as Swiss Ribbons and Essar Steel underscore the framework’s robustness. Continuous reforms, including pre-packaged insolvency and cross-border insolvency provisions, further enhance the system’s efficiency. CIRP under the IBC remains a pivotal tool for promoting entrepreneurship, ensuring credit availability, and fostering economic growth in India.
References
1. https://indiankanoon.org/doc/17372683/
2. https://blog.ipleaders.in/corporate-insolvency-resolution-process-under-ibc/#:~:text=T he%20whole%20process%20of%20CIRP,insolvency%20commencement%20date%2 0Otherwise%2C%20the
3. https://ibclaw.in/summary-of-landmark-judgment-of-supreme-court-in-committee-of creditors-of-essar-steel-india-limited-vs-satish-kumar-gupta-ors-under-ibc/
