Answer By law4u team
The Insolvency and Bankruptcy Code (IBC) sets strict timelines for the Corporate Insolvency Resolution Process (CIRP) to ensure timely revival or liquidation of stressed companies. If the Committee of Creditors (CoC) fails to approve any resolution plan within this stipulated period, it triggers a mandatory process that leads to the liquidation of the corporate debtor.
What Happens If No Resolution Plan Is Approved Within the Stipulated Time
Timeline Overview
The CIRP must be completed within 180 days, extendable by a maximum of 90 days under exceptional circumstances approved by the CoC.
If no resolution plan is approved by the end of this period, the CIRP timeline expires.
Initiation of Liquidation
Upon failure to approve a resolution plan, the Resolution Professional (RP) is required to file an application with the National Company Law Tribunal (NCLT) for the liquidation of the corporate debtor.
The NCLT then passes a liquidation order under Section 33 of the IBC.
End of Moratorium
The moratorium that protects the debtor from legal actions by creditors ends once liquidation begins.
Appointment of Liquidator
The RP is usually appointed as the liquidator or a new liquidator is appointed to oversee the liquidation process.
The liquidator takes charge of the company’s assets and operations.
Asset Sale and Distribution
The liquidator sells the assets of the corporate debtor through auctions or other methods to maximize value.
The proceeds are distributed among creditors as per the priority established in the IBC waterfall mechanism.
Impact on Stakeholders
- Equity shareholders and unsecured creditors often receive little or no recovery.
- Employees’ dues are settled as per priority and available funds.
- The corporate debtor ceases to exist as a legal entity post-liquidation.
Consequences for the Corporate Debtor
- The company is effectively wound up and removed from the register of companies.
- All ongoing business operations are halted.
Significance of Timely Resolution
- Encourages creditors and applicants to act swiftly to rescue viable companies.
- Prevents indefinite delay that harms creditors and the economy.
- Promotes efficient exit mechanisms for non-viable companies.
Example
A manufacturing company undergoing CIRP fails to attract any viable resolution plans within 270 days (including extension). The RP files for liquidation with the NCLT. The NCLT orders liquidation, and the liquidator auctions the company’s machinery and assets. The proceeds are distributed to secured creditors first, with unsecured creditors and shareholders receiving minimal returns.
