From framework to functionality: Can CLRP help mitigate corporate distress?

The Insolvency and Bankruptcy Board of India (IBBI), recognising the growing need for an out-of-court resolution mechanism within the existing insolvency framework, has proposed a Creditor-Led Resolution Process (CLRP) as an alternative model for resolving corporate distress. The proposed framework gained its fundamental elements from various sources i.e., the RBI Framework 2019 and other existing ‘out-of-court’ creditor-led processes in India, international models of ‘out-of-court’ insolvency resolution, and practical insights from the implementation of the Corporate Insolvency Resolution Process (CIRP) and Pre-packs under the Insolvency and Bankruptcy Code, 2016.

Core features of CLRP: Topping up the CIRP?

The model proposed by IBBI Committee Report of May 2023 specifies that only scheduled commercial banks and designated Financial Creditors (“FC”) can initiate the Creditor Led Resolution Process (CLRP) with a default threshold to be set at INR 1 Crore. Thus, Unrelated FCs could initiate the CLRP, if they collectively or individually hold at least 51% of the Corporate Debtor (“CD”)’s financial debt. The notice of default with the specified intention of CLRP initiation may be served on the CD. They may then form a committee to manage the ‘out of court’ initiated CLRP and with the appointment of Resolution Professional (“RP”), the process commences for invitation of plans from the market, just like CIRP.

The adjudicatory delays grappling the CIRP has been strategized in CLRP as only intimation by RP is required to Adjudicating Authority (“AA”)/ IBBI about the commencement of CLRP along with his appointment. The CD may be afforded an opportunity to submit a resolution plan to match resolution plan received from the market for best price discovery and value maximisation. The plan, approved with 66% majority of the CoC is for the first time, required to pass the adjudicatory test with AA for the final stamping, failing which the process will be referred to CIRP. The “out of court” initiated process has been dove- tailed with formal process only at the stage of final approval of plan wherein the AA is required to determine default, procedural conditions, compliances etc. The key features of the proposed framework in the Report are as follows:

• Debtor-in-Control Model which allows eligible and unrelated FCs to lead the process while the CD retains control of the company (debtor-in-possession model), thereby incentivizing the CD to cooperate.

• The CD is given the opportunity to submit a resolution plan and compete with the plans received from the market.

• The process facilitates early initiation and expedites resolution through FCs and only 150 days have been proposed for completion of the process.

• The absence of a formal admission process and the limited role of the AA, confined to notifying initiation and approving the plan which enhance time and cost efficiency.

Recently, the Insolvency Law Academy (“ILA”) also examined the features of the proposed framework and recommended enhancements to the process and advocates for pre-CLRP negotiation and mediation as methods to seek amicable resolutions prior to CLRP. It is worthy to note the proposal with respect to initiation of CLRP as the concept of imminent default is novice one for Indian regime as it could remedy the deteriorating financial condition of the CD before the occurrence of formal default. Another interesting tweak proposed here is the imposition upon the CD’s base plan to ensure 100% remittance to operational creditors dues. If the base plan would offer the discount on payments to OCs, then the CD’s base resolution plan must compete with any resolution plans submitted by other applicants.

Topping up the hurdles and challenges in CLRP implementation

The existing CIRP process has encountered delays that jeopardize asset value and may discourage global investors. To remedy these issues, CLRP is proposed, integrating creditor-led ‘out-of-court’ negotiations under the oversight of AA. The model is designed to enhance cooperation and enable earlier initiation of the resolution process. However, the success of these proposed changes will hinge on their formal integration into the Code but few challenges are enumerated below:

• Complexities of the Debtor-in-Possession Model: The debtor-in-possession framework may present challenges in delineating the rights and responsibilities of the RP while managing the CD’s ongoing operations. This dynamic could potentially lead to conflicts and inefficiencies in the resolution process.

• Financial Constraint: The costs associated with compensating a Resolution Professional could be substantial, raising concerns about the financial viability of the CLRP.

• Imminent Default: The lack of a clear definition for “imminent default” introduces ambiguity into the process, complicating the determination of when and how CLRP should be initiated.

• Absence of a Voluntary Code of Conduct: The framework lacks a voluntary code of conduct for creditors with enforceable sanctions as the entire process has been formalized at the behest of creditors and absence of code could undermine the effectiveness and accountability of the CLRP.

• Prolonged Process Due to Potential Failures: The possibility of pre-mediation and CLRP failing to resolve issues, leading to a transition to the CIRP, may result in extended timelines and increased procedural delays.

• Difficult Deadlines: The proposed framework requires the process to be formally completed in 150 days including the moratorium consideration, non-cooperation, resolution plan approval, wrongful commencement of CLRP etc indicate a difficult and complex target considering the infrastructural challenges, underdeveloped distressed asset market, potential litigations obstructing the process and other procedural predicaments.

The above set of challenges are not herculean and our previous experiences with prepacks, RBI resolution framework, CIRP etc. will certainly facilitate CLRP in navigating the challenges that may be presented by market and economy. To sum up, the success of CLRP would be tested on the floor of time but enforcement of the regulations with a clear vision on implementational hurdles could grab CLRP a Top-Up trophy for resolutions.

Anjali Jain is Partner - Insolvency & Restructuring Practice and Payal Golimar is Associate at Areness. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.