What Is Meant by Corporate Insolvency Resolution Process (CIRP)?

This article is authored by Ayushee Priya and edited by Mr. Anoop Prakash Awasthi, AOR and Adv. Prapti Singh.

CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Code. The trigger for initiating the CIRP is the ‘DEFAULT’ by the corporate debtor.

The process of insolvency of corporate debtors under the code applies where the minimum default amount is INR 1 crore (INR 10mn). The minimum amount of default for initiating CIRP was originally INR 1 lakh, but the Government vide notification dated 24th March 2020, increased the same to INR 1 crore.

Who Can Initiate the Corporate Insolvency Resolution Process?

If any Corporate Debtor commits a default, Corporate Insolvency Resolution can be initiated by filing an application before the Adjudicating Authority in the manner as provided under Chapter II of Part II of the Code.

CIRP may be initiated by either:

• a financial creditor (FC) under Section 7
• an operational creditor (OC) under Section 9
• a corporate applicant of a corporate debtor under Section 10 of the Code

Consequences of Initiation of Corporate Insolvency And Resolution Process

When insolvency is triggered under the code, there can be two outcomes: Revival of Corporate Debtor or Liquidation.  All attempts are made to resolve the insolvency by either coming up with a restructuring plan or a new ownership plan. If the resolution attempts fail, the company’s assets are liquidated. The primary aim of the code is to revive and save the CD (i.e, to resolve). Only once the CIRP fails, does the liquidation follow.

How to apply CIRP

The conduct of the CIRP (CIRP) of a corporate debtor is provided in Part II of the IBC, which are as follows:

Initiation of CIRP

The financial creditor can initiate the CIRP against the corporate debtor by applying to NCLT. The operational creditor should first give a demand notice of an unpaid invoice to the corporate debtor demanding the default payment amount. When the operational creditor does not receive payment from the corporate debtor after the expiry of ten days of delivery of the demand notice or invoice demanding payment, he can apply to NCLT for initiating the CIRP.

A partner or member of the corporate debtor authorised to initiate CIRP or a person in charge of managing the affairs or who has control and supervision over the financial affairs of the corporate debtor can initiate the CIRP with NCLT. 

NCLT will pass an order within fourteen days of either admitting or denying the CIRP application. The CIRP will commence from the admission date of the application by NCLT. The CIRP completion period is 180 days from the admission date of the CIRP application. 

Declaration of Moratorium and Public Announcement

After the admission of the CIRP application, NCLT will pass an order:

• Declaring a moratorium for prohibiting certain actions and transactions.
• Causing a public announcement of initiating the CIRP and call for the submission of claims.
• Appointing an interim resolution professional. 

NCLT orders on the CIRP commencement date declaring the moratorium for prohibiting the following:

• Continuation or institution of suits or proceedings against the corporate debtor.
• Encumbering, transferring, disposing of or alienating by the corporate debtor of its assets or beneficial interest or legal right.
• Any action to recover, foreclose or enforce any security interest created by the corporate debtor relating to its property, including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 
• Recovery of any property by a lessor or owner, where the property is in possession or occupied by the corporate debtor.

The public announcement of the CIRP should contain the following information:

• Name and address of the corporate debtor. 
• Name of the authority under which the corporate debtor is registered or incorporated.
• Last date for submission of claims.
• Details of the interim resolution professional who will be responsible for receiving claims and take over the management of the corporate debtor.
• Penalties for misleading or false claims.
• The date of closure of the CIRP, i.e. 180th day from the admission date of the CIRP application.

The interim resolution professional appointed will have the following powers relating to the corporate debtor from the date of his appointment:

• Management of the affairs of the corporate debtor.
• Exercise the powers of the board of directors or partners of the corporate debtor and suspension of the powers of the director or partner of the corporate debtor.
• Officers and managers of the corporate debtor will have to report to the interim resolution professional and give access to the records and documents of the corporate debtor.
• Financial institutions having and maintaining accounts of the corporate debtor will act on the instructions of the interim resolution professional and furnish all available information relating to the corporate debtor.

Committee of Creditors

The interim resolution professional will constitute a committee of creditors after collating all received claims against the corporate debtor and determining its financial position. The committee of creditors will consist of all the financial creditors of the corporate debtor. 

The committee of creditors should hold the first meeting within seven days of the constitution of the committee. The committee of creditors in their first meeting should decide to either appoint or replace the interim resolution professional through a majority vote of not less than 66% of the voting share of the financial creditors.

Appointment of Resolution Professional

When the committee of creditors decide to continue with the interim resolution professional appointed by NCLT as the resolution professional, it should communicate its decisions to NCLT, the interim resolution professional and the corporate debtor.

When the committee of creditors decides to replace the interim resolution professional, it should file an application to NCLT to appoint the proposed resolution professional along with his written consent. 

NCLT should forward the name of the proposed resolution professional submitted by the committee of creditors to the Insolvency and Bankruptcy Board of India (‘Board’) for its confirmation. NCLT shall appoint the proposed resolution professional after receiving confirmation from the Board. 

The resolution professional will conduct the entire CIRP and manage and control the operations of the corporate debtor during the CIRP.

Preparation of Information Memorandum

The resolution professional should prepare an information memorandum in the form and manner containing the relevant information as specified by the Board to formulate a resolution plan. A resolution applicant should submit a resolution plan prepared on the basis of the information memorandum to the resolution professional. 

The resolution applicant is the person who submits a resolution plan either individually or jointly with any other person. The resolution professional will examine each resolution plan submitted to him for confirming that each resolution plan-

• Provides for the payment of the insolvency resolution process costs as specified by the Board prioritising the payment of all other debts of the corporate debtor.
• Provides for the payment of debts of the operational creditors as specified by the Board.
• Provides for managing the affairs of the corporate debtor after approval of the resolution plan.
• Supervision and implementation of the resolution plan.
• It does not contradict the provisions of the law(s) in force. 
• Confirms to such other requirements specified by the Board.

The resolution professional will present the resolution plan after its examination to the committee of creditors for its approval. The committee of creditors can approve the resolution plan by a vote of not less than 66% of the voting share of the financial creditors.

Approval of Resolution Plan

The resolution plan for the revival of the company or LLP should be approved within 180 days from the commencement of the CIRP by the creditors. However, NCLT can extend the period of 180 days by another 90 days. 

NCLT will pass an order approving the resolution plan approved by the committee of creditors after being satisfied that the resolution plan meets the requirements of the IBC. NCLT order of approval of the resolution plan will be binding on the corporate debtor and its employees and members.

NCLT order of approval of the resolution plan will also be binding on the guarantors and stakeholders involved in the resolution plan and the creditors, including the Central or State Government or any local authority.

NCLT can pass an order to reject the resolution plan if it is satisfied that the resolution plan does not meet the requirements laid down under the IBC. When NCLT passes the order of rejection of the resolution plan, it will pass an order of the liquidation of the corporate debtor. 

After the approval of the liquidation of the corporate debtor, the committee of creditors will appoint the liquidator to sell the corporate debtor’s assets and share them among the stakeholders. The distribution of the assets will be made as per the provisions of the IBC.

Conclusion

The Corporate Insolvency Resolution Process (‘CIRP’) is a recovery mechanism for the creditors of a corporate debtor. A corporate debtor means a company or Limited Liability Partnership (‘LLP’) that owes a debt to its creditors. The Insolvency and Bankruptcy Code, 2016 (‘IBC’) lays down the provisions for conducting insolvency or bankruptcy of individuals, partnership firms, LLP and companies. However, the process of insolvency and liquidation of corporate debtors under the IBC applies where the minimum default amount is Rs.1 crore only.