Contributed by Vidushi Sehgal and Rahil Arora

India adopted the Insolvency and Bankruptcy Code, 2016 (“the Code”) to provide for time-bound resolution and restructuring of distressed assets within the insolvency landscape. To achieve this objective, three resolution processes have been laid down in the Code: the Corporate Insolvency Resolution Process (“CIRP”) which serves as the primary resolution procedure, the Fast-track Corporate Insolvency Resolution Process (“FCIRP”) designed for simpler cases with an analogous process to CIRP, and the Pre-packaged Insolvency Resolution Process (“Pre-packs”) which was introduced to cater to the needs of MSMEs affected by the pandemic. While both CIRP and FCIRP are time-bound processes, there have been procedural delays in practice resulting in value depletion and diminishing stakeholder confidence in the resolution process. Furthermore, Pre-packs have not been successful in ensuring out-of-court settlements and are unlikely to be extended to instances of large defaults given that they result in heavy haircuts for the creditors. To address these deficiencies, the Insolvency and Bankruptcy Board of India (“IBBI”) established an Expert Committee to provide for a revised Fast-track process that allows for an expeditious and efficient resolution process. In its Report, the Committee proposed the Creditor-Led Insolvency Resolution Process (“CLRP”) framework to facilitate a ‘creditor-led’ and ‘out-of-court’ initiated insolvency process, aiming to strengthen the insolvency resolution framework in the country.

Background

CLRP seeks to modify the existing FCIRP framework to allow for an ‘out-of-court initiated’ resolution mechanism with minimal involvement of the Adjudicating Authority (“AA”). The proposed framework offers statutory enforceability to the resulting resolution plans while maintaining the flexibility and efficiency of a creditor-led ‘out-of-court’ mechanism. Furthermore, the process allows the Corporate Debtor (“CD”) to function as a going concern without any shift in management upon initiation of the process.

The need for a ‘creditor-led’ framework was first discussed at the Colloquium on ‘Functioning and Strengthening of the IBC Ecosystem’ and subsequently, an MCA Discussion Paper laid down the bare bones of an “out-of-court” CLRP. While drafting the framework, the Committee drew upon insights from various sources including the RBI Prudential Framework 2019, the implementation experiences of CIRP and Pre-packs under the Code, and the international best practices on creditor-led resolutions. The introduction of this mechanism aims to alleviate the strain on the legal system, ensure timely resolution, particularly in case of defaults by large firms, and facilitate economic growth by fostering an environment conducive to foreign investments.

Key Features and Procedures

The proposed CLRP framework envisages an ‘out-of-court’ initiated insolvency process driven by Financial Creditors (“FC”) while CD remains in control. The debtor-in-possession model seeks to ensure a speedy process and departs from the creditor-in-control approach observed in CIRP and Pre-Packs, potentially resulting in diminished value due to change in control. The framework identifies financial institutions as unrelated FCs qualified to initiate CLRP because of the significant amount involved in their lending agreements and clearly outlined default events. However, to ensure efficiency and prevent any abuse of process, it has been proposed that initially this right should only be vested with scheduled commercial banks and other financial institutions, as may be notified by the Central Government. Further, it has been proposed that the CLRP framework be made applicable to both, MSME and non-MSME CDs, based on the income or asset size as prescribed by the Central Government.

The framework outlined in the Report can be divided into two stages. The first stage involves the ‘out-of-court process’ initiated by prescribed unrelated FCs while under the second stage, the Adjudicating Authority would assess whether the resolution plan passed by the Committee of Creditors (“CoC”) is eligible for approval. While CLRP preserves fundamental procedural aspects of CIRP such as obtaining CoC approval, it sets itself apart by prioritising predictability and limiting judicial intervention to approving the resolution plan and specified cases of fraud or mismanagement. Furthermore, a timeline of 150 days has been set for the completion of the resolution process. This includes 120 days (extendable by 45 days) allocated for the first stage or the out-of-court process, with the remaining 30 days reserved for the AA’s approval of the resulting resolution plan.

Stage I: Out-of-Court Mechanism

The prescribed unrelated FCs, holding more than 51% of the total financial debt of the CD either individually or collectively, may initiate the out-of-court mechanism upon a default of INR 1 Crore or above. However, such FCs must notify the CD of their intent to initiate CLRP and provide 30 days to resolve the default. Upon non-rectification or non-resolution of default, a Resolution Professional (“RP”) may be appointed to undertake formal steps for the commencement of CLRP. The proposed framework has eliminated the cumbersome process in CIRP of obtaining an admission order from the AA to commence proceedings. Instead, mere intimation to the AA and the Board is adequate to initiate CLRP. This streamlining aims to establish an expeditious and creditor-friendly regime that allows for timely distress identification and value maximization. The Committee also considered the introduction of an automatic moratorium upon commencement of proceedings, resembling the automatic stay under Chapter 11 of the US Code, to limit the scope of judicial intervention. However, it ultimately opted for the imposition of a temporary moratorium under Sections 14(1) and 14(3) of the Code, triggered by the filing of an application by the RP and subject to the final approval of the AA. Furthermore, the powers, composition, and functions of the CoC, along with the procedure of claims collection in CLRP, closely mirror that procedure under CIRP; with the notable exception that any creditor objections concerning the admission or rejection of claims may only be raised before the AA during the approval phase of the plan.

CLRP further ensures CD cooperation throughout the process by employing both incentives and deterrents. Minimizing delays provides an incentive to the CD to cooperate with the FCs to ensure timely completion of the process before it risks being declared an NPA and ineligible under Section 29A of the Code. While non-cooperation by the CD may result in penal consequences and potential conversion of CLRP to CIRP, at the option of the FC upon making an application to the AA. Moreover, CD’s participation has been further enhanced under the framework. While resolution plans may be invited from the public, the CD shall be allowed to match the best resolution plan received from the market under a “challenge mechanism”. An ideal plan may be assessed based on criteria such as credibility, feasibility, and value maximization. Nonetheless, the resolution plan must be approved by 66% of the CoC before being submitted to the AA for approval.

Stage II: Approval of the Adjudicating Authority

Under CLRP, the court’s jurisdiction is invoked under the second stage when the RP makes an application before the AA to seek approval for the resolution plan approved by the CoC. However, the AA’s jurisdiction while approving or rejecting such applications is limited to ensuring that the procedural requirements and mandatory requirements under the Code have been complied with including requisite approvals, timelines, and consideration of objections raised regarding the claims and the resolution plan. Upon receiving assent from the AA, the resolution plan under CLRP is intended to have the same effect as under CIRP and would be binding upon all stakeholders thus, providing the benefit of a “clean slate” to the Resolution Applicant or the CD.

Conclusion & The Way Forward

The CLRP framework concerns itself with the ‘debtor-in-possession’ model compared to the ‘creditor-in-control’ model under CIRP. This has been incorporated to allow the CD to continue as a going concern with the existing promoters in place who may be better equipped to maximize the cash flow of the distressed entity. Moreover, the proposed framework ensures transparency and cooperation by the CD by building upon the implementational experience of the Code and incorporating various deterrence measures in case of non-cooperation or bad faith by the CD. Earlier, the Pre-packs were intended to be extended to larger firms as well however, it was met with skepticism by financial institutions who were reluctant to accept the voluntary heavy haircuts that such a one-time settlement scheme may entail. However, CLRP seems to address this concern by providing freedom and flexibility to both, financial institutions and CDs. While CIRP may provide for high recoveries, it is often plagued with procedural delays and diminished asset valuations. CLRP addresses these practical issues while ensuring the fundamental components of CIRP continue to be followed. This streamlined approach allows for value maximization through the timely commencement of proceedings and a market-based pricing mechanism for distressed assets while reducing the resolution period from 330 days under CIRP to 150 days under CLRP. Moreover, the proposed framework may contribute towards the development of the insolvency landscape in India and pave the way for the subsequent adoption of the UN Model on Cross-Border Insolvency as laid down under Draft Z of the Code.