New Mechanism for Corporate Insolvency Resolution Process

February 7, 2025

The Insolvency and Bankruptcy Board of India (IBBI) has proposed a new framework aimed at enhancing the efficiency of the Corporate Insolvency Resolution Process (CIRP). This initiative addresses the challenges faced by interconnected corporate entities undergoing insolvency. The discussion paper released by IBBI marks various inefficiencies and conflicts that arise when multiple related entities are involved in CIRP simultaneously.

Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process is a legal process to resolve insolvency issues in corporate entities like private limited companies or public limited companies.
A company is insolvent when it cannot pay its debts.
There are two ways to check insolvency:
- Cash-flow test: Can the company pay its debts when they are due?
- Balance sheet test: Are the company’s liabilities greater than its assets?

Background of the Proposal

The need for reform emerged from recent judicial cases, such as Videocon Industries and SREI Infrastructure Finance. These cases showed that handling related firms separately leads to delays and higher costs. IBBI suggests a “coordinated resolution” approach, including joint hearings and a common resolution professional.

Issues with the Current System

Right now, each company is treated separately, ignoring their financial links.
This creates inefficiencies, increases costs, and weakens recovery for creditors.
Long-running cases like KSK Mahanadi (since 2019) show the need for reforms.

Concurrent Bidding for Faster Asset Sales

Currently, bids are invited first for the whole company, then for individual assets. This causes delays.
IBBI wants to allow both types of bids at the same time to speed up the resolution process.

Two-Stage Approval for Resolution Plans

There are delays between submitting a resolution plan and its approval by the National Company Law Tribunal (NCLT).
IBBI proposes a two-stage process:
- First, approve financial bids and implementation framework.
- Later, settle disputes between creditors.

Improving Interim Finance

Companies under insolvency need funds to continue operations.
IBBI suggests allowing interim finance providers to attend meetings as observers, reducing investment risks while keeping decision-making with creditors.

Enhancing Value Realisation

The proposed amendments aim to maximise value realisation from distressed assets. By allowing interim finance providers to participate as observers in the Committee of Creditors (CoC), the framework encourages greater involvement from financiers. This is expected to enhance the overall efficiency of the resolution process.

Public Consultation and Future Directions

IBBI has invited public comments on the proposed changes. The discussion paper outlines eleven proposals aimed at improving the efficiency and transparency of the CIRP. The amendments are expected to streamline resolution plan submissions and manage essential services more effectively.

Judicial Support for Reforms

Recent judicial precedents have brought into light the necessity for a more sophisticated approach to insolvency resolution. The NCLT’s stance on consolidation in cases like Videocon has opened the door for further reforms. The absence of a statutory mechanism for coordinated CIRPs has hindered effective implementation.

Balancing Powers in the Resolution Process

There is concern regarding the balance of power between resolution professionals and the CoC. Experts warn against excessive micro-management by the CoC, which could undermine the role of resolution professionals. Maintaining this balance is crucial for the effective functioning of the insolvency resolution process.

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