In order to facilitate the timely resolution and restructuring of deteriorating assets within the context of insolvency, India enacted the Insolvency and Bankruptcy Code, 2016 (referred to as “the Code”). Three resolution processes have been outlined in the Code to accomplish this goal: the Pre-packaged Insolvency Resolution Process (also known as “Pre-packs”) was created to meet the needs of MSMEs impacted by the pandemic; the Fast-track Corporate Insolvency Resolution Process (also known as “FCIRP”), which is intended for simpler cases and has a process similar to CIRP; also known as the Corporate Insolvency Resolution Process, which is the primary resolution procedure. Despite the fact that both CIRP and FCIRP have deadlines, procedural delays have actually occurred, which has reduced stakeholder trust in the resolution process and reduced its value. Additionally, because pre-packs force creditors to take high losses, they have not been successful in securing out-of-court settlements and are unlikely to be expanded to cases of significant defaults. The Insolvency and Bankruptcy Board of India (“IBBI”) constituted an Expert Committee to address these shortcomings and devise a redesigned Fast-track procedure that facilitates a prompt and effective resolution process. In order to enhance the nation’s insolvency resolution framework, the Committee suggested in its Report the Creditor-Led Insolvency Resolution procedure (“CLRP”) framework, which would enable a “out-of-court” and “creditor-led” insolvency procedure.
Reimagining the Framework: CLRP’s Bold Departure from Tradition
With the goal of allowing for an “out-of-court initiated” settlement process with the least amount of Adjudicating Authority involvement possible, CLRP aims to alter the current FCIRP structure. The suggested structure preserves the versatility and effectiveness of a creditor-led “out-of-court” process while providing the ensuing resolution plans with statutory enforcement. Moreover, the procedure permits the Corporate Debtor to continue as a going concern without requiring a change in management at the start of the procedure. Following the discussion of the necessity of a “creditor-led” framework at the Colloquium on “Functioning and Strengthening of the IBC Ecosystem,” an MCA Discussion Paper outlined the fundamentals of a “out-of-court” CLRP. The Committee used information from a number of sources to construct the framework, including the RBI Prudential Framework 2019, the experiences of CIRP and Pre-packs under the Code in terms of execution, and global best practices for creditor-led resolutions. The purpose of implementing this method is to reduce the burden on the judicial system, guarantee prompt settlement, especially in cases of defaults by major corporations, and promote economic growth by creating a climate that draws international investment.
Framework Overview: The Two-Phase Process of CLRP
There are two phases to the framework described in the report. The “out-of-court process” is started in the first stage by financial creditors that are mandated to be unconnected, and in the second step, the Adjudicating Authority determines if the resolution plan approved by the Committee of Creditors (“CoC”) may be approved. While CLRP maintains the essential CIRP procedural elements, such as obtaining CoC clearance, it differs in that it places more emphasis on predictability and restricts judicial involvement to certifying the resolution plan and specific instances of fraud or mismanagement. In addition, a deadline of 150 days has been established for the resolution procedure’s conclusion. This contains 120 days (extendable by 45 days) set up for the initial phase of the extrajudicial procedure, and 30 days set aside for the Adjudicating authority to approve the resolution plan that emerges.
When an INR 1 crore or more is not paid, the specified unconnected financial creditors, either individually or collectively, owning more than 51% of the corporate debtor’s total financial obligation, may start the out-of-court process. However, these financial creditors must provide the corporate debtor with 30 days’ notice to rectify the default and advise them of their intention to start the CLRP. If the default is not resolved or corrected, a Resolution Professional (“RP”) may be assigned to initiate the official process of launching CLRP. The laborious procedure in CIRP to acquire an admission order from the Adjudicating authority in order to start proceedings has been removed under the proposed framework. Rather, all that is required to start CLRP is a simple notification to the Board and the adjudicating authority. The goal of this streamlining is to quickly and amicably develop a system that facilitates the detection of distress and the optimisation of value for creditors. To further restrict the reach of court involvement, the Committee also explored instituting an automatic moratorium at the initiation of proceedings, akin to the automatic stay under US Code Chapter 11. Nevertheless, in the end, it decided to impose a temporary moratorium under Sections 14(1) and 14(3) of the Code, which would take effect upon the RP filing an application and be subject to the adjudicating authority’s final approval. Additionally, the CoC’s authority, functions, and duties as well as the CLRP’s claims collection process closely resemble the CIRP process, with the notable exception that creditor objections to the acceptance or rejection of claims may only be brought before the adjudicating authority during the plan’s approval phase.
CLRP uses both deterrents and incentives to further assure corporate debtor participation throughout the process. In order to avoid being deemed an NPA and losing its eligibility under Section 29A of the Code, the corporate debtor is incentivised to collaborate with the FCs in order to minimise delays and guarantee the timely completion of the procedure. However, if the corporate debtor doesn’t cooperate, there might be legal repercussions including, at the financial creditor’s discretion, the conversion of CLRP to CIRP upon an application to the adjudicating authority. Moreover, the structure has improved corporate debtor’s engagement even more. Resolution plans may be requested from the public, but under a “challenge mechanism,” the corporate debtor will be permitted to match the best resolution plan that it receives from the market. Value maximisation, viability, and believability are a few examples of the factors that may be used to evaluate an ideal strategy. However, before the resolution plan is presented to the adjudicating authority for approval, it needs to be accepted by 66% of the CoC.
When the RP applies to the adjudicating authority to seek approval for the resolution plan that the CoC has accepted, the court’s jurisdiction is triggered under CLRP’s second step. But the adjudicating authority’s authority to approve or reject such applications is restricted to making sure that the procedural and mandatory requirements under the Code have been followed, such as deadlines, necessary approvals, and taking objections about the claims and the resolution plan into account. The resolution plan under CLRP is meant to have the same impact as under CIRP and would be obligatory upon all stakeholders upon getting agreement from the adjudicating authority. This would provide the Resolution Applicant or the corporate debtor the advantage of a “clean slate.”
Future Prospects: CLRP’s Potential and Its Role in Evolving Insolvency Practices
The CLRP framework adopts the ‘debtor-in-possession’ approach as opposed to the ‘creditor-in-control’ model found in CIRP, aiming to allow the corporate debtor (CD) to continue operating under its existing promoters, who may be better positioned to optimize the distressed entity’s cash flow.
This framework is designed to ensure transparency and encourage corporation from corporate debtor by building on the code’s implementation experience. Moreover, it also introduces deterrents against non- cooperation or bad faith conduct by the corporate debtor.
While pre-pack schemes were initially intended for larger firms, they faced scepticism from financial institutions, which hesitated to accept the significant voluntary haircuts these one-time settlement schemes might require. However, the CLRP framework addresses this issue by offering both financial institutions and corporate debtors greater flexibility and autonomy. Although CIRP may lead to higher recoveries, it is frequently hindered by procedural delays and declining asset values. In contrast, CLRP tackles these practical challenges while preserving the essential principles of CIRP. This streamlined process maximizes value through a prompt initiation of proceedings and market-driven pricing for distressed assets, while also reducing the resolution period from 330 days under CIRP to 150 days under CLRP.
Additionally, the CLRP framework could significantly shape India’s insolvency landscape and set the stage for adopting the UN Model on Cross-Border Insolvency, as outlined in Draft Z of the Code.
This blog is written by Sarthak Bhatia, 4th year law student BBA-LLB (Hons) at UILS Chandigarh University.