Corporate Insolvency Resolution Process

Corporate Insolvency Resolution Process (CIRP) is a structured, time-bound mechanism established under the Insolvency and Bankruptcy Code (IBC), 2016. Its main goal is to help financially distressed companies recover, while ensuring that creditors get the maximum possible value from the company’s assets. Unlike older insolvency approaches, which often pushed companies straight into liquidation, CIRP introduces a more balanced approach. It shifts the management from the “debtor-in-possession” model, where the struggling company still controls its operations, to a “creditor-in-control” model, where creditors have significant authority to make decisions. 

This ensures that the process focuses on restructuring and reviving the company rather than immediately selling off its assets. By doing so, CIRP not only protects the interests of creditors but also aims to preserve jobs, maintain business operations, and stabilise the overall market. Moreover, the process is designed to be completed within a strict timeline, which reduces delays and provides a clear roadmap for resolving corporate insolvency efficiently.

Legal Framework of CIRP in India

The Legal Framework of CIRP in India is anchored by the Insolvency and Bankruptcy Code, 2016. Before this code, the insolvency landscape was fragmented with multiple laws like the SICA and SARFAESI Act, which often led to prolonged delays. The current framework operates through a specialised ecosystem:

• National Company Law Tribunal (NCLT): Acts as the Adjudicating Authority to admit or reject insolvency petitions.

• Insolvency Professionals (IPs): These are licensed experts who take over the management of the debtor to maintain the company as a "going concern."

• Insolvency and Bankruptcy Board of India (IBBI): The regulatory body that oversees the functioning of IPs and the overall insolvency process.

Initiating the Corporate Insolvency Resolution Process

The Corporate Insolvency Resolution Process (CIRP) is initiated when a company, known as the corporate debtor, fails to pay its debt of at least ₹1 crore. The process is triggered under the Insolvency and Bankruptcy Code (IBC), 2016, and it provides a legal framework for creditors or the company itself to seek resolution through the National Company Law Tribunal (NCLT).

Three types of applicants can initiate CIRP:

1. Financial Creditors:  Financial creditors are typically banks, financial institutions, or other lending organisations that have extended credit to the company. To initiate CIRP, financial creditors must prove the default through formal records. These records are often maintained by Information Utilities (IUs), which are centralised repositories that validate financial transactions and defaults. Once the default is confirmed, the financial creditor can apply with the NCLT to start the insolvency process.

2. Operational Creditors:  Operational creditors include suppliers, employees, contractors, or service providers who are owed money for goods or services provided to the company. Unlike financial creditors, operational creditors must first issue a formal demand notice to the corporate debtor. This notice gives the company 10 days to resolve the debt. If the company fails to respond or settle the dues within this period, the operational creditor can approach the NCLT to initiate CIRP.

3. Corporate Applicants (Voluntary Initiation):  In certain situations, the company itself can recognise its financial distress and voluntarily initiate CIRP. This is often a proactive step taken by companies that understand they are unable to repay their mounting debts. By doing so, the company can seek a structured resolution rather than being forced into liquidation. Voluntary initiation allows the management to collaborate with creditors and professionals to devise a feasible resolution plan, helping preserve the business, protect jobs, and maintain stakeholder confidence.

Stages of Corporate Insolvency Resolution Process

The Corporate Insolvency Resolution Process (CIRP) follows a structured and time-bound procedure designed to resolve insolvency efficiently. The process is generally completed within 180 days, but this timeline can be extended to a maximum of 330 days to account for legal delays. The stages are as follows:

Admission & Moratorium

Once the National Company Law Tribunal (NCLT) admits the insolvency application, it declares a moratorium under Section 14 of the IBC. This moratorium acts as a legal pause on all activities that could affect the company’s assets. During this period:

• Creditors cannot initiate or continue any lawsuits against the company.

• No action can be taken to transfer, sell, or encumber company assets.

• The company cannot make payments outside the ordinary course of business.

The moratorium ensures that the company’s assets are protected while a resolution plan is being prepared and prevents creditors from creating a chaotic situation by rushing to recover debts.

Appointment of Interim Resolution Professional (IRP)

After admission, the NCLT appoints an Interim Resolution Professional (IRP). The IRP plays a critical role in managing the company’s affairs during CIRP:

• Takes control of the company from the existing management.

• Protects and preserves the company’s assets.

• Ensures day-to-day operations continue as a “going concern.”

• Prepares an initial report for the Committee of Creditors (CoC) on the company’s financial situation.

Formation of Committee of Creditors (CoC)

The IRP identifies all financial creditors and forms the Committee of Creditors (CoC). The CoC is a key decision-making body in CIRP and holds powers such as:

• Approving or rejecting resolution plans.

• Deciding on the continuation or termination of the management.

• Evaluating offers from potential investors or resolution applicants.

This committee ensures that creditors’ interests are protected and that any resolution plan is financially viable.

Submission of Resolution Plan

The next step involves inviting Resolution Applicants to submit plans detailing how they intend to revive the company and repay debts. Each plan must include:

• The proposed repayment structure for creditors.

• Steps to restore business operations.

• Strategies to improve the company’s financial health.

The Resolution Professional (RP) reviews these plans and presents them to the CoC for evaluation.

Approval by NCLT

Once a resolution plan is approved by at least 66% of the CoC, it is submitted to the NCLT for final approval. After NCLT approval:

• The plan becomes legally binding on all stakeholders, including creditors, employees, and shareholders.

• The company can implement the plan under the supervision of the RP.

This final stage ensures that the company is either successfully revived or, if no viable plan is approved, prepared for liquidation in a structured manner.

Challenges in Implementing CIRP

Despite its revolutionary impact, several Challenges in implementing CIRP persist in the Indian market:

• Inordinate Delays: While the law mandates a 330-day limit, many cases drag on for years due to heavy litigation and a shortage of NCLT benches.

• Substantial Haircuts: Creditors often have to settle for a fraction of their original dues (haircuts), which can reach as high as 80-90% in some sectors.

• Liquidation Bias: If a viable resolution plan is not found within the timeline, the company is pushed into liquidation, often resulting in lower recovery values and job losses.

• Valuation Issues: Determining the fair market value and liquidation value of complex businesses remains a hurdle for IPs.