Answer By law4u team
In insolvency proceedings under frameworks like India’s Insolvency and Bankruptcy Code (IBC), the Committee of Creditors (CoC) plays a crucial role in approving a resolution plan for the corporate debtor. However, if the CoC fails to reach the required 66% majority to approve any plan within the prescribed time, the process does not halt—it triggers specific legal consequences. This situation can lead to liquidation of the company, impacting stakeholders, employees, and asset value.
Consequences When CoC Fails to Approve a Plan
Initiation of Liquidation Proceedings
If no resolution plan is approved within the stipulated 180 days (extendable up to 330 days), the adjudicating authority (NCLT) is mandated to order liquidation under Section 33 of the IBC.
Mandatory Liquidation under Section 33(1)
If CoC does not approve a plan and the maximum CIRP period expires, NCLT will pass a liquidation order, even if one or more plans were considered but none approved.
CoC May Voluntarily Vote for Liquidation
Before the CIRP period ends, the CoC may resolve to liquidate the corporate debtor by a 66% majority vote, especially if they assess that resolution is not viable.
No Further Bidding Allowed
Once liquidation is ordered, the option to submit or reconsider resolution plans is closed. The assets are sold to repay creditors as per the waterfall mechanism in Section 53 of the IBC.
Impact on Stakeholders
Employees may lose jobs, operational creditors often recover less than under resolution, and shareholders usually get nothing in liquidation.
Legal Framework and Timeline
CIRP Duration
180 days initially, extendable to 330 days in total with NCLT approval.
Failure to complete resolution within this time frame results in automatic liquidation.
No Resolution = Liquidation
Even if the plan is under consideration but no consensus is reached, the law prioritizes timely closure of insolvency to prevent value erosion.
NCLT’s Role
NCLT checks procedural compliance. If CoC does not approve a plan, it has no power to override or enforce resolution—it must initiate liquidation.
Example
A corporate debtor enters CIRP and three resolution plans are submitted. The CoC consists of five members, but none of the plans receive the 66% required voting share. Even after multiple rounds of negotiations, no plan is approved, and the CIRP period reaches 330 days.
Steps and Outcome:
- The resolution professional reports the failure to the NCLT.
- As per Section 33 of the IBC, NCLT orders liquidation of the corporate debtor.
- A liquidator is appointed to sell assets and distribute proceeds as per Section 53 waterfall.
- Financial creditors may recover a portion of their dues, but operational creditors and shareholders may suffer significant losses.
