Corporate Insolvency Resolution Process

Corporate Insolvency Resolution Process

What is CIRP

The IBC introduced the Corporate Insolvency Resolution Process(CIRP) as a time bound, creditor driven legal framework aimed at resolving financial distress of corporate entities.

Its primary objective is the Maximization of asset value and promotion of entrepreneurship by enabling the revival of viable businesses. By replacing the previously fragmented and prolonged procedures, the IBC and CIRP ensure speedy redressal, reduce legal uncertainty and foster investor confidence in the Indian economy.

Historical Evolution

Prior to the enactment of the Insolvency and Bankruptcy Code (IBC),2016, the insolvency and winding up of companies in India were primarily governed by the provisions of the Companies Act 1956, and subsequently by Companies Act, 2013. These legal frameworks included multiple overlapping laws such as The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA); The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993; The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002.

However, this system was widely criticized due to its insufficiencies and complex mechanism. The absence of a unified system resulted in significant delay in resolution or liquidation, of ten leading to erosion of asset value and increased burden on creditors. Thus, recognizing the need for reform, the Govt of India introduced IBC 2016, unlike the earlier framework, which focused predominantly on liquidation, the CIRP is resolution-oriented, ensuring speedy recovery, credit discipline and economic growth.

CIRP as defined in Legislation

The Corporate Insolvency Resolution Process is defined under the Insolvency and Bankruptcy Code(IBC),2016, and is governed by specific provisions under its framework.

Legal Provisions related to CIRP

Chapter II of the act lays down the procedural aspects of CIRP.

Section 6 specifies the categories of persons who may initiate the CIRP ,namely financial creditors, operational creditors, or the corporate debtor itself.

Section 7 empowers a financial creditor to file an application for initiating CIRP upon the occurrence of a default.

Section 9 enables an operational creditor to initiate after serving a demand notice and failing to receive payment or a dispute response.

Section 10 allows a corporate applicant (the defaulting company) to voluntarily file for insolvency.

In each of these cases, the application must be filed before the Adjudicating Authority, which is the National Company Law Tribunal (NCLT). Upon admission, CIRP is initiated to resolve the financial stress of the corporate debtor in a time-bound and structured manner

Minimum Default Value

Initially, the minimum threshold for default under the Insolvency and Bankruptcy Code (IBC) was ₹1 lakh. However, following a government notification issued in March 2020, this threshold was increased to ₹1 crore.

Adjudication Authority under CIRP

The National Company Law Tribunal (NCLT) serves as the Adjudicating Authority in such cases. It exercises territorial jurisdiction over the location of the registered office of the corporate person and is responsible for insolvency resolution and liquidation proceedings concerning corporate entities.

Explanation :

The National Company Law Tribunal (NCLT) is like a special court that handles cases related to companies. When a company is not able to pay its debts and someone wants to start the insolvency process, the case is filed in the NCLT.

The NCLT has power only in the area where the company’s registered office is located. So, if a company’s office is in Delhi, the Delhi bench of NCLT will look into the case. It looks after important issues like:

• Starting the insolvency process
• Approving or rejecting resolution plan
• Company-related disputes, mergers, or winding up

Once NCLT gives a decision, and if someone is not satisfied with it, they can appeal to a higher authority called NCLAT.

The National Company Law Appellate Tribunal (NCLAT) is like the next level court. If someone (like a creditor or the company) is unhappy with the decision of NCLT, they can go to NCLAT to challenge that decision.

NCLAT reviews the decision and may confirm, change, or cancel the order passed by NCLT.

Relevant parties

Financial Creditor, Operational Creditor, Corporate Applicant

Financial Creditor

As per Section 6 of IBC Act 2016, If a corporate debtor fails to pay its dues, the corporate insolvency resolution process (CIRP) can be started by a financial creditor, an operational creditor, or even by the corporate debtor itself, as per the process laid down in the Chapter II of IBC Act 2016.

Any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to is a Financial Creditor.

Section 7 of IBC act explains the Initiation of corporate insolvency resolution process by financial creditor as In the event of a default, a financial creditor may start the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor using the procedure outlined in Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. This clause states that if a default has taken place, a financial creditor may apply to the National Company Law Tribunal (NCLT), the Adjudicating Authority, either alone or in concert with other financial creditors. Evidence of the default, such as loan agreements, account statements, or any other required documentation, must be included with the application. The name of a suggested Interim Resolution Professional (IRP) may also be included, while this is not required.

Within 14 days after receiving the application, the NCLT must decide if it is complete. The NCLT will accept the application and start the CIRP if it is complete and all requirements are Within 14 days after receiving the application, the NCLT must decide if it is complete. The NCLT will accept the application and start the CIRP if it is complete and all requirements are met. The tribunal may, however, reject the application if it contains any errors, although it must give the applicant seven days to correct the errors. Formally, the CIRP starts on the day the application is accepted.

In Addition it must be noted that as per the Code,

Banks, financial institutions, and other lenders are considered financial creditors, as is any individual to whom a financial debt is owed. The inability of the corporate debtor to pay back the financial debt by the due date is referred to as default. Notably, even one creditor has the authority to start the CIRP on their own in situations involving several financial creditors, such as consortium financing. Therefore, Section 7 is essential in allowing creditors to pursue bankruptcy resolution in a systematic and time-bound way.

Operational Creditor

Any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred is known as an operational creditor.

Section 8 explains the procedure of insolvency resolution by operational creditor as:

First provide the corporate debtor with a demand notice or a copy of the invoice requesting payment in the event of a default. In addition to providing the debtor with a chance to contest the debt or make the required payments, this step acts as an official notification of the default. Then, the corporate debtor has ten days from the date of receipt of the demand notice to reply. Within this time frame, the debtor has two options: either pay back the amount demanded or disclose the existence of an ongoing dispute or proof that the debt has already been settled. The operational creditor may legally start CIRP by submitting an application under Section 9 of the Code if the corporate debtor does not reply within the allotted time or is unable to provide proof of a legitimate dispute or payment. In a nutshell, Section 8 is important because it guarantees a first assessment prior to the start of insolvency procedures. By shielding corporate borrowers from baseless accusations and giving them a fair chance to resolve conflicts or pay debts, it preserves the harmony between debtors' interests and creditors' rights.

Corporate Applicant

Corporate Applicant means  

• a) corporate debtor
• b) a member or partner of the corporate debtor who is authorised to make an application for the CIRP under its constitutional document  
• c) an individual who is in charge of managing the operations and resources of the corporate debtor
• d) a person who has the control and supervision over the financial affairs of the corporate debtor

Section 9 explains the procedure of insolvency resolution by Corporate applicant as:

The operational creditor may submit an application to the Adjudicating Authority (NCLT) to start CIRP if the corporate debtor does not reply to the demand notice within 10 days, does not pay the amount owed, or raises a legitimate disagreement. The recommended format is required for this application, and it should contain a copy of the invoice or demand notice sent to the corporate debtor, an affidavit confirming that no notice of dispute was received in response, and, if available, a certificate from a financial institution confirming that the payment has not been received. Additionally, the application should contain any other relevant documents or information supporting the claim. The operational creditor may also propose the name of an Interim Resolution Professional (IRP), which is optional but generally recommended to facilitate the initiation of the insolvency process.

In a nutshell, Section 9 ensures that operational creditors, after giving the debtor a fair opportunity to respond, can seek a time-bound resolution to recover their dues through the insolvency process. It also maintains safeguards against misuse by requiring proof of default and absence of genuine dispute.

Procedure to file CIRP application

Under the Insolvency and Bankruptcy Code, 2016, specific documents must be submitted along with the application for initiating the Corporate Insolvency Resolution Process (CIRP), depending on whether the applicant is a financial creditor, operational creditor, or corporate debtor. As per Section 7(3) of the Code read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, a financial creditor is required to submit a record of default from an information utility or any other evidence of default, along with the name of the proposed Interim Resolution Professional (IRP). In the case of an operational creditor, as per Section 9(3) and Rule 6, the application must include a copy of the invoice or demand notice, an affidavit stating that no dispute of the debt exists, and a certificate from a financial institution, or other proof confirming non-payment of the debt, such as records with an information utility. On the other hand, a corporate debtor, as per Section 10(3) and Rule 7, must submit information relating to its books of account, the name of the proposed IRP, and a special resolution passed by shareholders or a resolution passed by at least three-fourths of the total number of partners, approving the filing of the application. These documentation requirements ensure that the insolvency process is initiated with adequate proof, transparency, and internal consent, as applicable to the party initiating the process.

Interim Resolution Process and Stages- Pre admission Process, Post Admission Process, Liquidation stage

The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, begins with the pre-admission stage, where a financial or operational creditor, or the corporate debtor itself, files an application before the Adjudicating Authority (NCLT). The applicant must submit prescribed documents, including proof of default and, optionally, the name of a proposed Interim Resolution Professional (IRP). If the application is complete and no disputes are found (in case of operational creditors), the NCLT admits the application within 14 days, marking the start of CIRP.

In the post-admission stage, a moratorium is declared, and the IRP takes over management of the debtor’s affairs. A public announcement is made to invite claims from creditors. Within 30 days, the IRP constitutes the Committee of Creditors (CoC), which takes key decisions, including approval of a Resolution Professional (RP) and evaluation of resolution plans. The entire CIRP must be completed within 180 days, extendable by 90 days.

If no resolution plan is approved within the time frame, the corporate debtor moves into the liquidation stage. In liquidation, a liquidator is appointed, assets are sold, and proceeds are distributed according to the waterfall mechanism under Section 53 of the Code.

Slight differences and Nuances in the concept of CIRP and PIRP

CIRP is applicable to all corporate debtors and can be initiated by financial creditors, operational creditors, or the corporate debtor itself. In contrast, PIRP is exclusively available to Micro, Small, and Medium Enterprises (MSMEs) and can only be initiated by the corporate debtor with prior approval from 66% of unrelated financial creditors.

In CIRP, once the application is admitted by the National Company Law Tribunal (NCLT), an Interim Resolution Professional (IRP) is appointed, and control of the debtor's affairs passes to the IRP or Resolution Professional (RP). However, in PIRP, the existing management retains control of the business unless there is evidence of fraud or mismanagement. PIRP follows a debtor-in-possession model, unlike the creditor-in-control model of CIRP.

Another key difference is the timeline. CIRP must be completed within 180 to 330 days, whereas PIRP is designed to be faster, with a strict timeline of 90 days, extendable by 45 days. PIRP also requires a base resolution plan to be prepared before filing, making it more efficient and less disruptive than CIRP, which is a more public and formal process. Overall, while CIRP is suited for large and complex cases, PIRP offers a quicker and cost-effective solution for MSMEs willing to cooperate in resolving their financial distress

Clean Slate Doctrine

Introduction

The Clean Slate Doctrine is a fundamental legal tenet that is incorporated into the Insolvency and Bankruptcy Code, 2016 and is essential to the Indian corporate insolvency procedure. According to the doctrine, following a company's successful completion of the insolvency resolution procedure and when it is acquired by a new purchaser, the new owner shouldn't be responsible for any of the company's outstanding obligations, fines, or guarantees. In essence, this idea aims to provide the business with a "clean slate" or free from the burden of its previous financial issues.

Relevant Case Laws

In a number of significant decisions, the Indian Supreme Court has affirmed the Clean Slate Doctrine, reinforcing its pivotal function within the IBC framework which are as follows:

1. In the Essar Steel India Case that one of the main goals of the IBC is to unify all claims under a single framework and expedite bankruptcy procedures in India. The SC decided that all prior liabilities, including debts and fines, are eliminated if a resolution plan is accepted by the National Company Law Tribunal, this implies that no party may start or pursue any legal action pertaining to a claim that is not covered by the resolution plan that has been approved.
2. In the Edelweiss Asset Reconstruction Case that taxes and charges owed to the government are extinguished if they are not included in the resolution plan.
3. In the Surya Exim case, the Gujarat High Court, following the SC rulings, held that any tax demands issued after the NCLT’s approval of a resolution plan should be cancelled, reinforcing the idea that claims not included in the approved plan are no longer valid.

Recent Development

But Notwithstanding with these court decisions, new information has sparked questions over the Clean Slate Doctrine's ongoing application. According to reports, letters have been sent by Indian tax authorities, notably the Goods and Services Tax (GST) authorities to Businesses who have successfully completed the IBC resolution process, such as Tata Steel and B&B Global Enterprises for requesting reimbursement of pre-resolution GST dues on unpaid tax assessments. In the IBC settlement process, the tax authorities' main contention is that statutory dues, like taxes, are sovereign in nature and should not be treated the same way as other liabilities. They contend that tax claims survive the insolvency resolution process since the IBC's rules cannot override them unless these dues are expressly waived.

Comments

The Clean Slate Doctrine is essential to the IBC's main goal of assisting struggling businesses in their efforts to recover. The fundamental intent of the bankruptcy structure is compromised if companies that undergo the IBC resolution process are still dealing with unresolved financial and legal obligations, especially tax claims that were brought afterwards. The resurrection of distressed enterprises will be stymied by potential investors who are reluctant to join in the IBC process because they are afraid of inheriting unresolved liabilities. Thus, more collaboration between tax officers and insolvency specialists is essential, as is more defined administrative discipline within tax departments.

References

1. THE INSOLVENCY AND BANKRUPTCY CODE, 2016
2. IPLEADERS ARTICLE
3. Resources available on IBBI website
4. Legal Framework
5. IBBI Acts, Circulars, Rules, Guidelines
6. Ministry of Corporate Affairs for Reports, Guidelines, Circulars
7. AGENDAS RELATED TO CIRP PROCESS BY IBBI
8. ICSI MODULE FOR IBC CODE
9. Research Material for Clean Slate Doctrine
10. Case Laws- Real Estate Insolvency
11. Orders by Adjudicating Authorities