New Mechanism for Corporate Insolvency Resolution Process

Overview of the Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) is a legal procedure used to settle insolvency matters involving corporate entities, such as public or private limited businesses.
When a business is unable to pay its debts, it is said to be insolvent. Insolvency can be verified in two ways:

• Cash-flow test: Is the business able to settle its bills on time?
• Test of the balance sheet: Do the company's liabilities exceed its assets?

Context of the Proposal

Recent court cases like Videocon Industries and SREI Infrastructure Finance made change necessary. These cases demonstrated that managing connected businesses independently results in delays and increased expenses. IBBI recommends a "coordinated resolution" strategy that involves a common resolution professional and joint hearings.

Problems with the Existing System

At the moment, every business is handled independently, disregarding their financial ties, which leads to inefficiencies, higher expenses, and a more difficult time for creditors to collect. Prolonged examples such as KSK Mahanadi (from 2019) demonstrate the necessity of reforms.

Concurrent Bidding to Sell Assets More Quickly

• At the moment, the entire firm is up for bids, followed by specific assets.
• To expedite the settlement process, IBBI wishes to permit both kinds of bids concurrently.

Two-Step Resolution Plan Approval Process

• The National Company Law Tribunal (NCLT) takes a while to approve a resolution plan after it is submitted.
• IBBI suggests a two-step procedure:

• First, provide your approval of the implementation framework and financial bids.
• Later, resolve disagreements among creditors.

Enhancing Temporary Funding

In order to minimize investment risks and maintain decision-making authority with creditors, the IBBI recommends permitting interim finance providers to participate in meetings as observers. Insolvent companies require capital to continue operating.

Improving the Realization of Value

Maximizing the value realized from distressed assets is the goal of the proposed modifications. The framework promotes increased participation from financiers by permitting interim finance providers to serve as observers on the Committee of Creditors (CoC). It is anticipated that this will improve the resolution process's overall effectiveness.

Future Directions and Public Consultation

The public has been asked to comment on the suggested amendments by IBBI. Eleven recommendations are presented in the discussion paper with the goal of enhancing the CIRP's effectiveness and transparency. It is anticipated that the revisions will improve the management of critical services and expedite the submission of resolution plans.

Support for Reforms by the Judiciary

The need for a more complex approach to insolvency resolution has been highlighted by recent court rulings. Additional improvements have been made possible by the NCLT's position on consolidation in cases such as Videocon. Effective implementation of coordinated CIRPs has been hampered by the lack of a formal structure.

Power Balance in the Resolution Process

The power dynamics between the CoC and resolution experts are a source of worry. The role of resolution professionals may be compromised if the CoC engages in excessive micromanagement, according to experts. For the insolvency resolution process to operate effectively, this balance must be maintained.