Insolvency and Corporate Debt Restructuring in India are governed by the Insolvency and Bankruptcy Code (IBC), enacted in 2016. The IBC provides a single unified law for insolvency and bankruptcy in India, which aims to consolidate existing frameworks and improve the ease of doing business.
The process begins when a default occurs. A default is defined as non-payment of debt when it has become due and payable. Once a default occurs, the financial or operational creditor, or the corporate debtor itself, can initiate the Corporate Insolvency Resolution Process (CIRP) by filing an application to the National Company Law Tribunal (NCLT).
On acceptance of the application, NCLT appoints an Interim Resolution Professional (IRP) who takes over the management of the debtor company. The IRP constitutes a committee of creditors (CoC), the majority of which are financial creditors.
The CoC then appoints a Resolution Professional (RP) who invites resolution plans from prospective resolution applicants. In this stage, restructuring of debt is considered and negotiated.
If the CoC approves a resolution plan, then the NCLT will sanction it, binding all stakeholders. If no plan is approved within a maximum time period of 330 days, then the company will go into liquidation.
1. Moratorium: The moment CIRP is initiated, a moratorium period commences, during which no lawsuits or recovery proceedings can be initiated or continued against the debtor company.
2. Management Change: The power of the Board of Directors is suspended and the appointed Resolution Professional takes control, focusing on running the business as a going concern and facilitating resolution discussions.
3. Devolving of Debt: The financial creditors stand first in line to be paid from the proceeds of resolution or liquidation, followed by operational creditors and then other debts and dues.
4. Shareholder Rights: The rights of shareholders may be severely affected as depending on the resolution plan, their shares can be written off or significantly diluted.
The IBC regime in India brings with it a shift from the earlier ‘debtor in possession’ to a ‘creditor in control’ model, prioritizing the maximization of value of assets for creditors and seeks to promote entrepreneurship, availability of credit and balance the interests of all stakeholders. Nonetheless, its effect on the stakeholders’ rights must be properly understood.