Answer By law4u team
In the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, a Resolution Plan is a proposal aimed at resolving the financial distress of a corporate debtor. However, for it to be executed and for the debtor’s financial troubles to be resolved, the plan must be approved by the appropriate authorities. The Committee of Creditors (CoC) plays a crucial role in this approval process, followed by a final approval from the National Company Law Tribunal (NCLT).
Who Approves a Resolution Plan?
Committee of Creditors (CoC):
The CoC plays the most critical role in approving a Resolution Plan. The CoC consists of the financial creditors of the corporate debtor and is responsible for evaluating and voting on any Resolution Plan submitted during the CIRP.
The CoC assesses the Resolution Plan based on how it meets the financial creditors’ interests, as well as the debtor’s viability and the potential for business revival.
A Resolution Plan is approved by the CoC if it receives a majority vote from the financial creditors. Specifically, the CoC must approve the plan by a majority of at least 66% (in value) of the total voting share of the financial creditors.
Example:
If a company has ₹100 crore in total debt, creditors holding more than ₹66 crore in debt must approve the Resolution Plan for it to pass.
Insolvency Resolution Professional (IRP)/Resolution Professional (RP):
While the IRP or RP does not approve the Resolution Plan, they play an essential role in overseeing the process. The IRP/RP ensures that the plan complies with the Insolvency and Bankruptcy Code (IBC) and provides technical, legal, and operational support to the CoC during the evaluation of the plan.
The RP submits the Resolution Plan to the CoC after evaluating its feasibility, and the CoC votes to approve or reject it.
National Company Law Tribunal (NCLT):
Once the CoC approves the Resolution Plan, it is submitted to the National Company Law Tribunal (NCLT) for final approval.
The NCLT verifies whether the Resolution Plan adheres to all legal requirements under the IBC, including ensuring that it is fair, just, and equitable to all creditors, and that it complies with the applicable laws.
If the NCLT is satisfied with the Resolution Plan, it approves it, making the plan binding on all stakeholders (including creditors and the corporate debtor).
If the NCLT rejects the plan, the CIRP may continue, and the debtor may eventually go into liquidation if no other Resolution Plan is found.
Key Conditions for Approval:
The Resolution Plan must meet the following conditions before CoC approval:
- It must provide a better recovery for creditors than liquidation.
- It should address the debts of financial creditors and operational creditors equitably.
- It must be in compliance with the IBC and applicable laws.
- It should ensure that the CIRP costs (costs related to the insolvency proceedings) are met.
Rejection of a Resolution Plan:
If the CoC does not approve the Resolution Plan, or if the Resolution Plan fails to meet the requirements laid down by the IBC, the corporate debtor may be subjected to liquidation under Section 33 of the IBC.
Example of the Approval Process:
Company ABC Ltd.
CIRP Initiation: ABC Ltd., a company facing insolvency, enters the CIRP after the NCLT accepts the petition filed by a financial creditor.
Resolution Plan Submission: Several resolution applicants submit their Resolution Plans. The Resolution Professional (RP) evaluates them and presents them to the Committee of Creditors (CoC).
CoC Vote: The CoC votes on the Resolution Plans. A majority vote of 70% of the financial creditors approves one Resolution Plan.
NCLT Review: The approved Resolution Plan is then submitted to the NCLT for final approval.
NCLT Approval: The NCLT examines the plan, ensuring compliance with legal provisions and creditor fairness, and approves it.
Outcome: The Resolution Plan is implemented, ABC Ltd. restructures its operations, and creditors receive payments as per the approved plan, thereby avoiding liquidation.
Conclusion:
The Resolution Plan is a vital component in resolving insolvency under the Insolvency and Bankruptcy Code (IBC), 2016. While the Committee of Creditors (CoC) plays the primary role in approving the plan, NCLT provides the final seal of approval. The Resolution Plan offers an opportunity for the corporate debtor to restructure its financial obligations, continue operations, and avoid liquidation, benefiting creditors and stakeholders in the process.
