What Is a Resolution Plan?

A Resolution Plan is a structured proposal designed to help a corporate debtor resolve its insolvency issues under the Insolvency and Bankruptcy Code (IBC), 2016. It provides a mechanism for the corporate debtor to restructure its operations, settle debts, and return to a financially stable position, avoiding liquidation. The Resolution Plan is key to the Corporate Insolvency Resolution Process (CIRP) and is designed to maximize the value of the debtor’s assets while providing creditors with a better alternative than liquidation.

Key Aspects of a Resolution Plan

What is a Resolution Plan?

A Resolution Plan is a comprehensive proposal submitted by an interested party, such as an investor or resolution applicant, to resolve the insolvency of a corporate debtor.

It is aimed at restructuring the debtor’s financial obligations, continuing its business operations, and repaying creditors to the greatest extent possible, within the framework defined by the IBC.

The Resolution Plan provides the framework for the revival of the company and serves as an alternative to liquidation.

Process of Developing the Resolution Plan:

Resolution Applicants:

Once the CIRP is initiated, interested parties (investors, other companies, or creditors) can submit their Resolution Plans.

The Resolution Professional (RP) invites and assesses various Resolution Plans, which may involve restructuring the company’s debts, transferring the business to a new entity, or offering a combination of debt forgiveness and new financing.

Committee of Creditors (CoC):

The CoC plays a key role in evaluating the Resolution Plan. It is responsible for assessing whether the plan provides an optimal solution for creditors and if it meets the requirements under the IBC.

The CoC votes on the Resolution Plan, and it must be approved by a majority (not less than 66%) of the financial creditors. After CoC approval, the plan is submitted to the National Company Law Tribunal (NCLT) for final approval.

Key Components of a Resolution Plan:

Repayment to Creditors:

The Resolution Plan outlines how the creditors’ claims will be settled. This may involve a mix of cash payments, asset transfers, debt restructuring, or a combination thereof.

Financial Creditors:

The plan must offer the financial creditors a recovery that is higher than what they would receive in the event of liquidation.

Operational Creditors:

The plan should also take into account operational creditors (e.g., suppliers, employees), though they typically receive lower amounts than financial creditors.

Reorganization of Business:

The Resolution Plan may include measures to restructure the corporate debtor’s business, such as cutting down operations, selling non-core assets, or laying off employees.

Debts and Liabilities:

The plan must propose how the debts and liabilities will be handled, including payment terms, timelines, and the amount of debt to be written off.

Management Structure:

If required, the Resolution Plan may include the appointment of new management or changes to the existing leadership to improve the company’s governance and financial stability.

Implementation Timeline:

The plan should also include a detailed timeline for the implementation of the restructuring process and achieving financial recovery.

Compliance with Legal Requirements:

The Resolution Plan must comply with all relevant legal provisions, including any required approvals from regulators (such as the Competition Commission of India, or CCP if necessary).

Minimum Requirements for the Resolution Plan:

According to Section 30(2) of the IBC, the Resolution Plan must meet the following conditions:

• It must be consistent with the provisions of the IBC and other applicable laws.
• It must ensure the payment of the insolvency resolution process costs.
• The plan should take into account the interests of all creditors (both financial and operational).
• It must not be discriminatory against any creditor or stakeholder.
• It should propose a feasible path for the revival of the corporate debtor.

Approval of Resolution Plan:

Once the Resolution Plan has been evaluated and approved by the CoC, it is submitted to the NCLT for final approval. The NCLT will verify the plan’s compliance with the IBC and its fairness to the creditors.

The NCLT has 14 days to approve or reject the Resolution Plan. If approved, the plan becomes binding on all stakeholders.

Failure to Approve a Resolution Plan:

If the CoC fails to approve a Resolution Plan, or if no plan is forthcoming, the corporate debtor may proceed to liquidation under the IBC. In such a case, the liquidation value of the company’s assets will determine what creditors will receive.

Example of a Resolution Plan

XYZ Ltd.

CIRP Initiation: XYZ Ltd., a company facing severe financial stress, undergoes insolvency proceedings after the NCLT admits a petition filed by a financial creditor.

Resolution Applicants: Several companies, including a major industry player, submit their Resolution Plans. The Resolution Professional (RP) evaluates these plans.

Plan Details: The selected Resolution Plan involves restructuring XYZ Ltd.’s debt by converting a portion of it into equity, reducing outstanding liabilities, and offering creditors a percentage of the company’s future profits.

CoC Approval: The Committee of Creditors (CoC) votes on the plan, and a majority approves the proposal.

NCLT Approval: The Resolution Plan is submitted to NCLT for final approval. The NCLT approves the plan, allowing XYZ Ltd. to continue operations under the new structure.

Conclusion

A Resolution Plan is the cornerstone of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016. It aims to provide a structured approach to resolving a corporate debtor’s insolvency, offering a way for the company to restructure its debt and continue operations while ensuring that creditors are paid in a fair and efficient manner. For a Resolution Plan to be successful, it must be comprehensive, feasible, and aligned with the interests of creditors and other stakeholders. If approved by the Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT), it paves the way for the company’s revival and future success.