Enhanced Framework for Corporate Insolvency Resolution

Current Affairs National

Posted by newadmin on 2025-02-10 08:57:41 |

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

CIRP is a legal process designed to resolve insolvency issues in corporate entities such as private and public limited companies. A company is considered insolvent when it cannot pay its debts, which can be assessed using two methods: the cash-flow test, which determines whether a company can pay its debts when they are due, and the balance sheet test, which evaluates whether a company’s liabilities exceed its assets.

The need for reform arose from recent judicial cases, including Videocon Industries and SREI Infrastructure Finance. These cases demonstrated that treating related firms separately results in delays and higher costs. To address this, IBBI suggests a “coordinated resolution” approach that includes joint hearings and a common resolution professional. The current system treats each company as an independent entity, overlooking their financial links. This separation causes inefficiencies, increases costs, and weakens creditor recovery efforts. Cases like KSK Mahanadi, which has been unresolved since 2019, highlight the urgent need for reform.

One of the key proposed changes is allowing concurrent bidding for faster asset sales. Currently, bids are invited first for the whole company and then for individual assets, leading to delays. IBBI’s proposal to allow both types of bids simultaneously aims to speed up the resolution process. Another suggested reform is a two-stage approval process for resolution plans. At present, there are significant delays between submitting a resolution plan and its approval by the National Company Law Tribunal (NCLT). IBBI proposes that financial bids and the implementation framework should be approved first, with disputes between creditors addressed later.

To improve interim financing, which is essential for companies under insolvency to continue operations, IBBI suggests allowing interim finance providers to attend meetings as observers. This measure would reduce investment risks while keeping decision-making authority with creditors. The proposed amendments also seek to maximize value realization from distressed assets. By involving interim finance providers as observers in the Committee of Creditors (CoC), the framework aims to encourage greater participation from financiers, thereby improving the efficiency of the resolution process.

IBBI has invited public comments on these proposed changes, which are outlined in a discussion paper containing eleven proposals aimed at improving the efficiency and transparency of CIRP. The amendments are expected to streamline resolution plan submissions and ensure better management of essential services.

Judicial precedents have underscored 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. However, the absence of a statutory mechanism for coordinated CIRPs has hindered effective implementation. A key concern in the resolution process is maintaining a balance of power between resolution professionals and the CoC. Experts caution against excessive micro-management by the CoC, which could undermine the role of resolution professionals. Ensuring this balance is crucial for the effective functioning of the insolvency resolution framework.

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