Distressed companies face a myriad of challenges that can jeopardise their survival and long-term viability.  Debt Overload, liquidity crisis, inefficient operations, market challenges, compliance issues, litigation challenges, lack of strategic direction, brand erosion, supply chain vulnerabilities, labour issues, under utilised assets, obsolete inventory, reputational damage and many more. Recognizing and addressing these challenges requires a holistic and well-coordinated approach.  

It’s crucial for distressed companies to work closely with financial and legal experts who understand the local regulatory landscape. Early identification of financial distress and proactive measures can significantly increase the chances of successful turnaround.  

A survey by the World Bank conducted in the year 2005 stated that the average time taken to wind up or liquidate a company in India is 10 years, a stark contrast to the 1 to 6 years observed in other countries. These prolonged timelines pose a significant disadvantage to the interests of all stakeholders involved.  

In December 2016, the Indian Parliament enacted the Insolvency and Bankruptcy Code (Legislative Department, 2016). This legislation assures a streamlined, time bound and less cumbersome process for the restructuring or reorganisation of a firm’s debt. Additionally, it aims to expedite the liquidation of struggling businesses, facilitating the efficient recovery of creditors’ investments. 

The IBBI (Insolvency and Bankruptcy Board of India), the regulating Body was established on 1st October 2016 under the Insolvency and Bankruptcy Code. The IBC sets up The NCLT (National Company Law Tribunal) as an adjudicating authority to deal with insolvency cases relating to Companies & LLPs.  An application relating to Insolvency can be filed to NCLT by Financial Creditors (lenders), Operational Creditors (suppliers of goods & services including employees) or the Corporate debtor (entity itself) in case of default in debt payment.  

IBC proposes two options, that is CIRP (Corporate Insolvency Resolution Process) & If CIRP fails then liquidation.  The threshold for initiating Corporate Insolvency Resolution Process (CIRP) in the case of default is set at Rs 1 crore. 

CIRP (Corporate Insolvency Resolution Process): 

When the NCLT receives the application to initiate the CIRP process, it will declare a moratorium. Next the Interim Resolution Professional (IRP) shall be appointed. The interim resolution professional is authorised to examine the books of account, records, and other pertinent documents and information relating to Corporate debtor.  

Within 3 days of his appointment, the Insolvency Professional shall make a public announcement and call for submission of claims from the stakeholders. The public disclosure encompasses details regarding – 

(a) the corporate debtor’s name and address,  

(b) the authority overseeing the incorporation/registration of the corporate debtor,  

(c) the deadline for submitting claims,  

(d) information about the interim resolution professional,  

(e) the anticipated date for concluding the Corporate Insolvency Resolution Process (CIRP),  

(f) the location where claim forms can be downloaded or acquired, and (g) available options for obtaining the forms.  

Public announcement can be in the website of any of the corporate debtors, in one English and one regional language newspaper with wide circulation at the location of the registered office and principal office of the corporate debtor.  

The financial creditors & operational creditors shall submit claim with proof  in relevant forms to the interim resolution professional. The interim resolution professional is tasked with gathering and organising all claims submitted by creditors following the public announcement. Subsequently, they will establish the committee of creditors, consisting of financial creditors, with the stipulation that none of them are related parties.  If there are no financial creditors or if they are related parties, then a committee of operational creditors is established.  Representatives are appointed for the Committee of creditors through voting of members.  3 insolvency professionals are appointed to represent the Committee of creditors.  

Two registered valuers are appointed to determine the fair value and liquidation value of the corporate debtor.  Fair value refers to the anticipated achievable worth of the assets belonging to the corporate debtor. This valuation is based on the assumption that these assets would be exchanged on the insolvency commencement date between two parties— a willing buyer and a willing seller—engaging in an arm’s length transaction.  Liquidation value refers to the anticipated realizable worth of the assets belonging to the corporate debtor in the event of its liquidation on the insolvency commencement date. 

Resolution plan is formulated through the information memorandum.  The information memorandum along with the evaluation matrix is submitted to each member of the committee of creditors.  The resolution plan may include provisions of corporate restructuring such as merger, amalgamation and demerger. Prospective resolution applicants shall submit resolution plans.  

Payments will be executed in accordance with the resolution plan endorsed by the committee of creditors for the corporate debtor.  If the resolution plan is not submitted within 180 days of the insolvency commencement date, or within an extended period determined by the Adjudicating Authority, orders for the liquidation of the corporate debtor may be issued. 

 If the applicant feels the order passed by NCLT is not satisfactory, they may appeal before NCLAT (Appellate Tribunal) within a period of 30 days from the order. If the person is not satisfied with the order from NCLAT he can reach the Supreme Court within a period of 45 days from the date of order passed by NCLAT.  

The IBC also provides provision for Fast Track CIRP for a few categories of corporate debtors notified by the Central Government .  They are: 

•  a small company 
•  a startup  
• An unlisted company with total assets mentioned in financial statements not above Rs. 1 Crore. 

The timelines for the completion of Fast Track CIRP is 90 days.  

Given the intricacies involved in the CIRP process, it is highly recommended that companies seek guidance from knowledgeable professionals in the respective domain. Consultants can conduct in-depth financial analysis of the corporate debtor, helping stakeholders understand the financial health of the company. They can also contribute to the development of restructuring plans to revive the business. In summary, consultants play a multifaceted role during the CIRP, leveraging their expertise to navigate financial, legal, and operational complexities, ultimately contributing to the formulation and execution of viable resolution strategies.