Corporate insolvency is the state in which a company is unable to pay its debts when they become due because of several reasons, including cash flow issues and excessive debt. The efficiency of the corporate insolvency resolution process (CIRP) depends on the actions of the stakeholders. The Insolvency and Bankruptcy Board of India (IBBI) regulates the actions of each stakeholder during the CIRP and ensures that the interests of stakeholders are addressed fairly according to the Code and its relevant rules and regulations.
Understanding Stakeholders in Insolvency
There are different types of stakeholders involved in CIRP, such as the corporate debtor, its creditors, resolution professionals, the Committee of Creditors (CoC), and the Adjudicating Authority.
The role of each stakeholder in the insolvency process:
- Corporate Debtor: The corporate debtor is the company going through the insolvency resolution process and who owes a debt to any person. The failure to pay the debts to the creditors by the corporate debtor is the reason for initiating CIRP. Their current financial situation, number of creditors, assets, liabilities, etc. will decide the resolution plan that concludes the resolution process.Â
- Creditors: Creditors are the individuals or companies to whom the debts are owed, and include a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder as per section 3(10) of the IBC.Â
- Resolution Professional: The resolution professional (RP) is an insolvency professional who manages the corporate debtor’s affairs, which includes taking over the business operations and assets of the corporate debtor. They also ensure that each stakeholder is informed about the financial state of the debtor and the ongoing resolution process.Â
- Committee of Creditors: The CoC has an important role in the approval of the resolution plan which will revive, rehabilitate, or restructure the company. Upon the decision of the CoC, the corporate debtor may also be liquidated and cease to exist.Â
- Adjudicating Authority: The National Company Law Tribunal (NCLT) is the Adjudicating Authority in the insolvency resolution process. The NCLT admits or rejects the application for initiating CIRP, overseeing the resolution process, and deciding whether or not to revive, rehabilitate, or restructure the corporate debtor.Â
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The Need for Balancing Interest
The Preamble of the IBC states the purpose of the Code, which is to encourage entrepreneurship, availability of credit and balance the interests of stakeholders. The objective of CIRP is to help the corporate debtor with their debt obligations and ensure that the creditors are paid for such debts. To do this, the interests of all stakeholders need to be considered. The RP, CoC, and NCLT aim to settle the stakeholder’s claims without the liquidation of the debtor, which can be done only when they identify different perspectives of each stakeholder. If the stakeholder interests are neglected the resolution process will most likely fail, reduce trust in the credibility of the debtor or credits, and poor decision-making of the RP, CoC, and NCLT.
IBBI’s Approach to Stakeholder Interests
IBBI governs stakeholder participation through the IBC, rules, and regulations, which also include the code of conduct of insolvency professionals at different stages of the resolution process. The IBBI also establishes several mechanisms to protect the stakeholder’s interests. For instance, as per Circular No. IBBI/LIQ/70/2024, the liquidator has to submit a progress report and preliminary report under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 to the Adjudicating Authority to ensure that the stakeholders are informed about any changes during the process. The liquidator also forms the Stakeholders Consultation Committee to advise them on matters related to the sale of the debtor.
Challenges in Balancing Interests
The provisions under the IBC and its related regulations do specify the rights of different stakeholders and the treatment of each one, many challenges are faced by the IBBI in balancing their interests. Balancing interests under the CIRP is significant as every stakeholder may not have enough resources at the commencement of the resolution process to satisfy the claims of all the stakeholders fully. There is a lack of awareness of the law among stakeholders which may lead to certain actions that are inconsistent and contravene the IBC, and delay in submitting relevant information. This results in the delay of completion of CIRP in which certain stakeholders may be held liable for such actions. The resolution professional and the CoC may also not fulfill their duties during the resolution process, such as to keep the business going. The absence of cross-border insolvency laws also may reduce the IBC’s effectiveness.
Best Practices for Stakeholder Engagement
Stakeholder engagement is fundamental for the success of the CIRP. It is important to maintain the fairness and transparency of insolvency and bankruptcy processes. Each stakeholder has their own needs and expectations during the process, so understanding their requirements, financial or otherwise, is essential. To do so, efficient and effective communication is paramount. Keeping stakeholders informed about the progress of the case that is clear, concise, and transparent, ensures the balance of the stakeholder’s interests. Using technology to facilitate stakeholder involvement will simplify the process of identifying and analysing stakeholders, establishing effective and efficient communication, monitoring and evaluating the CIRP, managing risks and issues involved in the resolution process, and overall improving the outcome of the proceedings.
Future Directions
The insolvency domain is continuously evolving making the process of resolution complex, hence, continuous improvement is required. There have been steps to adapt to the changing industry such as the Pre-Packaged Insolvency Resolution Process and fast-track resolution process under section 56 of the IBC. The current insolvency system can also improve rapidly by utilising technology in the CIRP. Artificial intelligence can be used by regulatory authorities to make more informed decisions during the resolution process and the insolvency professional can use blockchain technology to verify the creditor’s claims and inform the stakeholders immediately about any changes in the case. The insolvency resolution process also does not have a well-established system for handling cross-border insolvency, leaving many gaps in the resolution process of foreign debtors or creditors.Â
Conclusion
The Insolvency and Bankruptcy Code, 2016 has the objective to balance the interests of the stakeholders through the corporate insolvency resolution process. This process ensures that the resolution plan is formed early and more efficiently as it ensures transparency and establishes an effective communication strategy. The actions of each stakeholder influence the outcome of the resolution process. The insolvency professional, the Committee of Creditors, and the National Company Law Tribunal have the role of removing the obligations of the debt from the corporate debtor and supervising the interests of the stakeholders with equity. By reaching a decision that balances the interests of the stakeholders the resolution process is streamlined and the debtor may be revived, restructured, or rehabilitated successfully.