Answer By law4u team
The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016 aims to either resolve the financial distress of the corporate debtor or liquidate the company. However, if the Committee of Creditors (CoC) fails to approve a resolution plan, the company faces significant consequences. Liquidation is the default outcome when a resolution plan is not approved, which leads to the sale of the debtor’s assets to repay creditors.
What Happens if No Resolution Plan Is Approved?
Liquidation of the Corporate Debtor
If the CoC does not approve a resolution plan within the prescribed timelines, the corporate debtor is required to go into liquidation.
This is mandated under Section 33(2) of the IBC. Liquidation involves selling the company’s assets and distributing the proceeds among the creditors based on the order of priority established by the IBC.
Liquidation Process
The Insolvency Professional (IP) appointed during CIRP takes over the liquidation process, which includes identifying and selling assets, settling claims, and disbursing the proceeds to creditors.
Liquidation is the final option when there are no reasonable prospects for a resolution or when the creditors cannot agree on a resolution plan.
Impact on Creditors
Financial Creditors and Operational Creditors are paid in the order of priority as set out in the IBC:
- Secured creditors: Paid first, followed by unsecured creditors.
- Operational creditors: Paid after financial creditors but before equity shareholders.
In liquidation, creditors may recover only a fraction of the debt owed to them, depending on the value of the company’s assets.
Moratorium Ends
When the CIRP process concludes without an approved resolution plan, the moratorium (which protects the company from legal actions and recovery efforts) ceases to apply.
Creditors can then initiate recovery proceedings and file claims as per the liquidation process.
Employees' Rights and Stakeholder Interests
Employees and other stakeholders of the company are impacted by liquidation as they may not receive the full value of their claims.
Workers’ dues are treated as operational creditors in the order of priority during liquidation, which means their claims may be settled after financial creditors have been paid.
Key Reasons for Non-Approval of Resolution Plan
Lack of Consensus Among Creditors
One of the main reasons the CoC may fail to approve a resolution plan is a lack of consensus among the creditors regarding the viability of the plan or disagreements on the offered settlement terms.
Inadequate Proposal
If the resolution plans submitted by potential resolution applicants do not offer sufficient value or are not feasible, creditors may reject them.
Failure to Meet Minimum Criteria
A resolution plan must meet certain statutory requirements under Section 30 of the IBC, including providing a fair recovery for creditors and ensuring that the company continues as a going concern. If the plan fails to meet these criteria, it may be rejected.
Liquidation Process Steps
Declaration of Liquidation:
Once the CoC rejects all resolution plans or the process surpasses the CIRP time limit (330 days), the NCLT passes an order for liquidation.
Appointment of Liquidator:
The Insolvency Professional (IP) who was managing the CIRP becomes the liquidator, overseeing the sale of assets and the payment of creditors.
Asset Sale:
The company’s assets are sold in an orderly process to recover funds. The sale proceeds are distributed among creditors based on priority.
Final Distribution:
After all assets are liquidated, the remaining proceeds are distributed as per the priority order:
- Secured creditors: First priority
- Unsecured creditors: Second priority
- Operational creditors: Third priority
- Equity shareholders: Last priority
Example of a Company Entering Liquidation
ABC Pvt. Ltd.
Financial Distress: ABC Pvt. Ltd., a manufacturing company, has defaulted on debt of ₹50 crore.
CIRP Initiated: The Insolvency Professional (IP) is appointed, and the CoC is formed.
Resolution Plans: Several resolution plans are submitted by potential buyers, but none of the plans receive approval from the CoC due to disagreements over terms.
Post-330 Days: As the CIRP process exceeds 330 days and no resolution plan is agreed upon, the NCLT orders liquidation under Section 33(2) of the IBC.
Liquidation: The company’s assets are sold, and the proceeds are used to pay off creditors based on the priority order. Secured creditors recover a substantial portion of their debt, but unsecured creditors and operational creditors may recover much less.
Conclusion
If no resolution plan is approved during the Corporate Insolvency Resolution Process (CIRP), the corporate debtor faces liquidation. This process involves selling off the company’s assets and distributing the proceeds among creditors based on the priority of claims set by the Insolvency and Bankruptcy Code (IBC). The failure to approve a resolution plan often results in significant losses for creditors, especially for unsecured creditors and equity shareholders, as liquidation may not recover the full value of their claims.
