Companies or individuals often take loans for different business activities. Most of the time, this is a low-risk act wherein the obligations are met, and the debt is repaid successfully. However, the other scenario is also quite common. Herein, a company or individual is unable to pay back the debts and has to go through the Insolvency Resolution Process (IRP). It is a legal process that is initiated by a creditor when the borrower defaults on repayments.
IRP is essentially a legal procedure designed to resolve the insolvency of a company or an individual. Through this process, the assets and liabilities of an entity that is financially distressed are managed transparently.
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The aim of the IRP is to extract as much value as possible from the assets of the borrower and then fairly distribute them amongst the creditors. The entire process falls under the Act Insolvency and Bankruptcy Code, 2016. The Insolvency and Bankruptcy Code 2016 (IBC) is the bankruptcy law prevalent in India. For companies in India, the National Company Law Tribunal (NCLT) is the statutory body that initiates the IRP.
IRP provides a framework for the restoration, reconstruction, or liquidation of the insolvent entity. It often has a two-fold objective with different priorities. Its first and foremost goal is to recover the outstanding dues, as much as possible, for the creditors. Its second goal is to attempt to rescue the insolvent entity during the process. If IRP is unsuccessful in reviving the defaulting company, the liquidation process commences.
Here are the steps involved in the Corporate Insolvency Resolution Process (CIRP) -
The IRP must usually be resolved within 180 days. The authorities may provide a 90-day extension depending on circumstances. The maximum duration of an IRP should be no longer than 330 days. In extremely exceptional cases, it may go over 330 days as well.
A seamless insolvency resolution process is crucial for the economy of a country. In India, the code has helped strengthen the economy by expediting the resolution of insolvency and liquidation proceedings. It has addressed many non-performing loans and has helped resolve them in an amicable manner. In the process, the code has helped many failing businesses and suffering creditors.