Answer By law4u team
The Corporate Insolvency Resolution Process (CIRP) is a time-bound and regulated process under the Insolvency and Bankruptcy Code (IBC), 2016 to revive insolvent companies. The process aims to maximize value for stakeholders through resolution or liquidation. During CIRP, while the company is under the supervision of the Resolution Professional (RP) and the Committee of Creditors (CoC), it is possible for the company to enter into settlements with creditors, provided certain legal conditions and procedural safeguards are strictly adhered to. Such settlements can help avoid prolonged insolvency proceedings and facilitate quicker resolution.
Detailed Explanation of Settlement During CIRP
1. Settlement Before Admission of Insolvency Application
The company can negotiate directly with creditors before the National Company Law Tribunal (NCLT) admits the insolvency petition.
If an amicable settlement is reached, the applicant (creditor or corporate debtor) may withdraw the insolvency application without further proceedings.
This prevents unnecessary litigation and promotes consensual resolution.
2. Settlement After Admission – Withdrawal under Section 12A
Once the insolvency application is admitted and CIRP is underway, the IBC allows withdrawal only under Section 12A.
Withdrawal requires:
A genuine settlement or compromise between the corporate debtor and creditors.
Approval by at least 90% of the voting share of the Committee of Creditors (CoC).
Submission of an application by the applicant through the Resolution Professional (RP) to the NCLT.
Formal NCLT approval of the withdrawal application.
This process ensures that withdrawal is not misused to circumvent the insolvency framework and protects creditors’ interests.
3. Role of the Resolution Professional (RP)
The RP acts as a facilitator and gatekeeper of the settlement process.
The RP verifies the authenticity of the settlement and documents.
The RP calls a meeting of the CoC to present the settlement proposal.
The RP files the withdrawal application to the NCLT after CoC approval.
4. Committee of Creditors’ (CoC) Role
CoC members review the settlement proposal carefully.
They consider financial viability, fairness to all creditors, and impact on recovery prospects.
The threshold of 90% approval is stringent to ensure broad-based consent.
5. Limitations and Restrictions
No settlement or withdrawal is permitted after a resolution plan has been approved by the NCLT.
Settlements must be transparent, genuine, and documented; sham or coercive settlements can be challenged.
Operational creditors generally do not have a role in CoC approval but can be included in settlement negotiations.
If the settlement fails, CIRP continues without interruption.
Benefits of Settlement During CIRP
Avoids lengthy insolvency processes and associated costs.
Helps restore business operations smoothly.
Enables faster realization of dues for creditors.
Preserves goodwill and business relationships.
Prevents liquidation and loss of value.
Best Practices for Settlement During CIRP
Prepare a detailed settlement agreement outlining payment terms, timelines, and conditions.
Ensure transparency by involving all key stakeholders.
Get legal advice to avoid future disputes.
File all necessary documents and seek formal approvals promptly.
Keep communication open between the RP, creditors, and the debtor company.
Example
A pharmaceutical company undergoing CIRP due to default on loans negotiates with its major financial creditors for a partial upfront payment and the rest in installments.
Steps followed:
The company and creditors agree on settlement terms and draft an agreement.
The Resolution Professional verifies the settlement documents and calls a Committee of Creditors meeting.
The CoC approves the settlement with 93% voting share.
The RP files an application under Section 12A for withdrawal with the NCLT.
The NCLT reviews the application and approves the withdrawal, ending the CIRP.
