Insolvency & BankruptcyCIRP Initiation Process under the IBC

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) has emerged as a cornerstone of India’s economic reforms, providing a unified and efficient framework for resolving corporate insolvency. At the heart of the Code lies the Corporate Insolvency Resolution Process (CIRP)—a time-bound and creditor-driven mechanism aimed at reviving distressed companies or, when revival is not possible, proceeding to liquidation.

Whether you are a financial creditor, an operational creditor, or a corporate debtor facing default, understanding how to initiate the CIRP is critical. This article explains how to initiate a CIRP under the IBC with a step-by-step breakdown of the eligibility, process, documentation, timelines, and practical nuances for creditors (both financial and operational) and corporate debtors.

What is CIRP under the IBC?

The CIRP is a collective legal process through which stakeholders of a defaulting company attempt to resolve its financial distress. It is a legal mechanism through which creditors or the corporate debtor itself can initiate insolvency proceedings. The CIRP is designed to maximize the value of assets, ensure equitable treatment of creditors, and either facilitate a turnaround through a resolution plan or initiate liquidation if revival is unfeasible.

Key Objectives of CIRP:

• Preserve the value of the debtor’s assets: When insolvency proceedings are initiated, a moratorium is imposed to prevent any erosion of asset value through legal claims, asset stripping, or unauthorized transactions. This ensures that the company remains a going concern during the resolution period and that its assets are available for equitable distribution.
• Maximize creditor recoveries: The CIRP shifts the focus from piecemeal recoveries through fragmented litigation to a unified resolution process that maximizes the collective recovery for all creditors. The Code empowers the Committee of Creditors (CoC) to evaluate and approve resolution plans that offer better recovery prospects than liquidation, thereby incentivizing stakeholders to find a workable solution.
• Promote entrepreneurship and ease of doing business: By offering a mechanism to resolve genuine business failures without attaching criminality or stigma, the IBC encourages entrepreneurship and risk-taking. It assures lenders and investors that a predictable and efficient exit route exists in the event of default, thereby improving credit discipline and fostering economic growth.
• Encourage time-bound resolution over prolonged litigation: The IBC imposes strict timelines for the completion of the CIRP, which contrasts sharply with the delays associated with traditional debt recovery mechanisms. This time-bound nature reduces uncertainty, speeds up decision-making, and enhances investor confidence in India’s insolvency ecosystem.

Who can initiate a CIRP?

A CIRP can be initiated by the following parties by filing a petition before the National Company Law Tribunal (NCLT):

• Financial Creditors (under Section 7): A financial creditor, such as a bank or financial institution to whom a financial debt is owed, can file an application to initiate a CIRP against a corporate debtor upon a default.
• Operational Creditors (under Section 9): An operational creditor, such as a supplier of goods or services to whom an operational debt is owed, can initiate a CIRP after the corporate debtor fails to pay the outstanding amount following the delivery of a demand notice.
• Corporate Debtor (under Section 10): A corporate debtor may voluntarily file an application to initiate a CIRP to restructure its debts.

If the NCLT is satisfied that a default has occurred and the application is complete, it will admit the petition, formally commencing the CIRP.

Stages of the CIRP

Stage 1: Initiation of CIRP and Appointment of IRP Upon admission of the application by the NCLT, the CIRP officially begins. The NCLT issues an order that includes the appointment of an Interim Resolution Professional (IRP) to oversee the process.

Stage 2: Moratorium and Public Announcement With the commencement of the CIRP, a moratorium is declared under Section 14 of the IBC. This prohibits the institution of new lawsuits or the continuation of pending suits against the corporate debtor. The powers of the board of directors are suspended, and the IRP takes control and management of the corporate debtor’s affairs. The IRP then makes a public announcement in Form A, inviting creditors to submit their claims.

Stage 3: Formation of the Committee of Creditors (CoC) The IRP collates and verifies all claims submitted by creditors. Based on the verified claims, the IRP constitutes the Committee of Creditors (CoC), which comprises all financial creditors of the corporate debtor. The IRP submits a report to the NCLT certifying the constitution of the CoC. The CoC is the primary decision-making body during the CIRP, as its members have the main financial stake in the company’s resolution. The first meeting of the CoC must be held within seven days of its constitution.

Stage 4: Appointment of the Resolution Professional (RP) In its first meeting, the CoC decides whether to continue with the IRP or appoint a new Resolution Professional (RP) to manage the CIRP. The RP then appoints two registered valuers to determine the fair value and liquidation value of the corporate debtor.

Stage 5: Powers and Duties of the IRP/RP The IRP/RP manages the company as a going concern. They may appoint legal or financial professionals to assist in the process. With the approval of the CoC, the RP can sell unencumbered assets outside the ordinary course of business if it is necessary for a better realization of value, subject to certain limits.

Stage 6: Invitation and Submission of Resolution Plans The RP issues an invitation for Expressions of Interest (EOI) in Form G, inviting potential resolution applicants to submit revival plans for the company. The RP conducts due diligence to verify the eligibility of each applicant. The resolution plan must provide for the management of the corporate debtor, payment of insolvency resolution costs, and payment to operational creditors. The RP reviews all submitted plans to ensure they comply with the requirements of the IBC before presenting them to the CoC. The CoC then evaluates the feasibility and viability of each compliant plan.

Stage 7: Approval of the Resolution Plan A resolution plan must be approved by the CoC with a vote of not less than 66% of the voting share of the financial creditors. Once approved, the RP submits the plan to the NCLT for its final approval. If the NCLT approves the plan, it becomes legally binding on the corporate debtor and all stakeholders. If the CoC does not approve a resolution plan within the prescribed CIRP timeline, or if the NCLT rejects the plan, the NCLT will order the liquidation of the corporate debtor.

Ground for rejection of a CIRP Application

An application to initiate a CIRP may be rejected by the NCLT on several grounds:

• Time-Barred Debt: If the claimed debt is barred by the Limitation Act, 1963, the application will be dismissed.
• Incomplete Documentation: The IBC is a document-intensive process. Failure to provide required documents, such as loan agreements, invoices, demand notices, or evidence of default (especially from an Information Utility), can lead to rejection.
• Existence of a Pre-existing Dispute: For applications filed by operational creditors, the NCLT will dismiss the application if the corporate debtor can prove the existence of a genuine dispute that predates the demand notice.
• Procedural or Filing Errors: Filing the application in the wrong form, failing to follow procedural rules, or filing before the incorrect NCLT bench can lead to dismissal.
• Lack of Authorization: An application filed by a corporate debtor under Section 10 requires a valid board resolution and, in some cases, a special resolution from shareholders. The absence of proper authorization will render the application invalid.

CIRP’S impact on Creditors and Businesses

The CIRP has significantly impacted India’s business and credit landscape.

• It has instilled greater credit discipline among corporate borrowers and helped deter deliberate defaults.
• The time-bound nature of the CIRP has led to faster resolutions and improved recovery rates for creditors compared to previous regimes.
• By providing a predictable and efficient settlement mechanism, the IBC framework has made India a more attractive destination for investors and has fostered greater trust in the country’s legal and financial systems.

AMLEGALS Remarks

The Corporate Insolvency Resolution Process is a powerful legal mechanism that not only reshapes the creditor-debtor relationship but also plays a pivotal role in improving the overall credit environment in India. As this guide has demonstrated, successfully navigating the CIRP requires not just an awareness of statutory forms and timelines, but also a firm grasp of substantive legal principles, stakeholder rights, and tribunal practices.

However, the CIRP is not without its challenges. Procedural lapses, inadequate documentation, or failure to meet threshold requirements can derail the process before it begins. Thus, careful planning, professional advice, and strict compliance with the IBC framework are critical to success.

As India’s insolvency jurisprudence continues to evolve, stakeholders must remain vigilant, well-informed, and ready to adapt.In conclusion, the CIRP under the IBC represents not just a legal process, but a broader commitment to economic efficiency, creditor protection, and responsible entrepreneurship. Those who approach it with preparation and purpose will be best placed to navigate its complexities and unlock its transformative potential.

— Team AMLEGALS

Please reach out to us at rohit.lalwani@amlegals.com in case of any query.