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Previously, a company's winding-up procedure was governed by the Companies Act 2013 under Sections 304 to 323. However, in 2016, the Insolvency and Bankruptcy Code (IBC) introduced CIRP. CIRP full form is Corporate Insolvency Resolution Process. This process seeks to swiftly address defaulting companies' problems and maintain their operations.
The full form of CIRP is Corporate Insolvency Resolution Process. It is a legal mechanism that resolves the insolvency of Companies and Limited Liability Partnerships. The National Company Law Tribunal (NCLT) is in charge of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency Bankruptcy Code (IBC) 2016. When a business is unable to pay its creditors, NCLT takes charge of the situation. CIRP may be applied for by the business itself, a financial creditor or an operational creditor.
The NCLT suspends the sale of the company's assets for six months following initiation. The Tribunal assesses and determines the best course of action during this period, which may include asset liquidation, debt resolution or business restructuring.
CIRP may be initiated by financial creditors, operational credits or the corporate debtors. During the Corporate Insolvency Resolution Process (CIRP), the following documents are required along with the application form:
The following documents are required for financial credits need to be submitted along with the application form:
Record of default along with information utility or any such other documentation/evidence of default.
Name of the resolution professional who is being proposed to serve as an interim resolution professional.
Any other information the Board specifies.
For the operational creditors, the following documents are required during CIRP proceedings:
A demand notice delivered to the corporate debtor or a copy of an invoice requesting payment.
An affidavit attesting no notice of dispute from a corporate debtor for an outstanding debt.
A certificate from the financial organization in charge of the creditor's accounts attesting to the corporate debtor's failure to pay an outstanding debt.
Provide a report from the information utility attesting to the debt's non-payment, if such a report is available.
Any further documentation/proof that the central government specifies that verifies an outstanding debt.
For corporate debtors, these documents are necessary at the time of CIRP:
Records that showcase a corporate debtor’s books of accounts for any specified period of time.
Proposed Interim Resolution Professional’s details.
A special resolution from shareholders/resolutions from at least 3/4th of the partners to approve the application filing.
The process for resolution or liquidation of company:
A Financial Creditor, Operational Credits or the Corporate Debtor (CD) itself may initiate the Corporate Insolvency Resolution Process. For this, they must file an application with the adjudicating authority i.e., National Company Law Tribunal (NCLT). The date the adjudicating authority admits the application, the CIRP process begins. We refer to this date as the Insolvency Commencement Date.
Under Section 14 of the Insolvency and Bankruptcy Code 16, a moratorium is declared, which effectively halts various actions against the corporate debtor. The declaration of moratorium prevents the institution of suits, continuation of pending proceedings and transfer, encumbrance or disposal of the assets that the debtor possesses.
To act as an Interim Resolution Professional (IRP), an insolvency professional is appointed by the Tribunal. The control and custody of the corporate debtor is transferred to the IRP’s hands on and from the initiation date of CIRP. As a result, the powers of the Board of Directors or Partners of the CD are suspended. The IRP makes a public announcement using Form A for inviting claims from CD’s creditors.
After the IRP is done collating and verifying claims, and preparing a list of creditors, the Committee of Creditors (CoC), primarily comprising financial creditors, is formed. The IRP then files a report certifying the constitution and creditor list with NCLT.
The first meeting of CoC is held within 7 days of the filing of this report with NCLT. The committee then determines the expenses the IRP incurs, which become the insolvency resolution process costs. For the corporate debtor, CoC is the decision-making body, and actions that the IRP takes up must be confirmed by CoC.
In its first meeting, CoC decides whether the IRP appointed by NCLT will also be appointed as the Resolution Professional (RP). RP is responsible for the appointment of two registered valuers who can determine the fair value as well as the liquidation value of the corporate debtor, in accordance with Regulation 35 of IBC 2016.
In addition to registered valuers, the IRP or RP may designate any professional to help him carry out his responsibilities in managing the corporate insolvency resolution process. If the RP feels that a sale of the corporate debtor's unencumbered asset or assets is required for a better realization of value under the particular facts and circumstances of the case, he may do so outside of the ordinary course of business. The book value of all the assets sold together, however, cannot be more than 10% of the total claims that the IRP has admitted.
The resolution professional shall provide an opinion regarding whether the corporate debtor has engaged in any transactions that fall under the purview of sections 43, 45, 50 or 66 of IBC Code.
The resolution professional, using Form G, shall publish brief particulars regarding invitation for expression of interest. The public announcement outlines that the corporate debtor is going through an insolvency action, and that all the interested candidates/bidders are asked to file a resolution plan that could be chosen. It is the duty of the RP to check the eligibility of all the prospective resolution applicants and conduct due diligence. The resolution plan must be submitted by the prospective resolution applicant within the due date as prescribed under Form G.
A resolution plan proposed must prioritize the payment of CIRP costs, operational credits and ensure the management of the corporate debtor's affairs upon such a plan’s implementation. In IBC’s provisions and regulations, several other requirements are outlined and must be compulsorily complied with.
The RP will evaluate whether the plan the Resolution Applicant (RA) has filed meets requirements under IBC. The professional shall submit all the resolution plans that adhere to the Code's requirements and its implementing regulations. The CoC will then assess each plan, document its discussions regarding the viability as well as the feasibility of each resolution plan and cast votes on all of the plans in a simultaneous manner.
If the members of CoC approves the resolution plan with 66% or more of the voting share, the RP shall file an application with NCLT seeking the plan’s approval. It is then up to the Tribunal to approve or reject the plan. The plan becomes legally binding on CD and all the relevant parties if NCLT approves it. However, if NCLT rejects the plan or doesn’t receive any plan within the CIRP period, it may order CD’s liquidation.
The following are some possible results of the Corporate Insolvency Resolution Process:
Legal action and debt repayment moratorium: After a company is accepted into the CIRP by the NCLT, no further legal action against the defaulter may be taken. Additionally, all debt is immediately placed under moratorium.
Management change: A resolution specialist takes over the company's management.
Successful Resolution: The defaulter may eventually be taken over by a new management that has been approved by the CoC.
Liquidation: The NCLT may authorize the resolution professional to place the defaulter in liquidation if the CIRP is unable to locate a successful resolution applicant by the deadline.
Creditor Recovery: Operational creditors, which may include employees and government obligations, are charged after financial creditors in any recovery.
Effect on shareholders: Depending on the resolution plan, shareholders typically witness a total dilution of equity.
The debtor may emerge from insolvency as a going concern with restructured debt and an operational model, or it may enter liquidation if a resolution is not feasible, depending on the resolution plan that the CoC has approved.
CIRP full form is Corporate Insolvency Resolution Process. It is a legal process that handles the insolvency of a corporate debtor i.e., a company or limited liability partnership that owes a debt to a creditor. During the insolvency resolution process, a dedicated Resolution Professional is appointed by the NCLT. Such a professional oversees the process and ensures compliance with the IBC.
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