Understanding challenges in CIRP while managing business as going concern

Keeping a corporate debtor undergoing corporate insolvency resolution process as a going concern is one of the biggest challenge that an insolvency professional faces. Amitesh Deshmukh, Assistant Professor of Law, Hidayatullah National Law University (HNLU), discusses as part of his lecture during an IBBI-NLUJ Certificate Course on ‘Evolving IBC’ the many challenges of keeping a business under CIRP as a going concern.

Insolvency resolution is the first order objective of IBC and hence whenever the business is declared insolvent it is incumbent upon the system to manage the business as a going concern. The idea of keeping the business a going concern can also be seen as a test to determine the viability of the business as it cannot be kept a going concern if it is not profitable and legitimate. Therefore, keeping the business a going concern is the cornerstone of the Insolvency Resolution Process.

As already provided in various literature, the process of CIRP is designed in such a manner that the Resolution Professional may keep the business running and may take creditors’ sanction for certain decision calls. The process has certain vital aspects to be taken care of, some of them are:

• application for initiation (may be done by Financial creditors, Operational creditors, or the Debtor themselves),
• moratorium (stay on all proceedings/actions/acts against the assets of the debtor by the debtor themselves or otherwise),
• Appointment and role of resolution professional(s) (wherein the issues of multiple replacements, code of conduct, and appointment of IPEs are important),
• Committee of Creditors (major discussion revolves around the understanding of creditors’ wisdom, restraints on the wisdom, and synergy of CoC’s decision-making powers with shareholders),
• The resolution plan (including who shall not be resolution applicants, the reason behind mandatory contents of the plan, and whether a plan selected by the committee can be rejected by the adjudicating authority).

Whereas, the discussion about CIRP and managing business as a going concern cannot be fruitful if the practical challenges are overlooked. When it is proclaimed that the RP shall ensure “management of operations of the corporate debtor as going concern” (s. 20, IBC), it puts an additional responsibility of running the business while resolving insolvency. Some issues that garner heed under the said theme are:

• Interim finance: as the business is already undergoing CIRP it is strenuous to bring in finance as the risk of investing in such a business is higher. Meaning thereby that the returns being offered to such financer should match the said risk, to reduce the risk the Report of Insolvency Law Committee, 2020 suggested giving it super-priority in repayments;
• Interim moratorium: Unlike certain other jurisdictions, Indian law does not provide for an interim moratorium that can be brought into force while the application for initiation of CIRP is pending before the AA. Such a provision would ensure that the time taken for deciding the admission of application (which is averagely much more than the prescribed 14 days window) will not be used by an unscrupulous promoter/director or an actively secured creditor in impairing the assets of the debtor.
• Dispute resolution: Disputes between the parties may further bring delays in coming up with a resolution plan. Also, a CIRP otherwise fruitful shall not be delayed owing to a dispute between the parties and hence resolution of disputes becomes important.
• Natural Calamities/: Sometimes situations in no one’s control may impact the business, for example, the Covid outbreak in 2020. A calamity does not only impact the prospects of running the business but also alters the rescue and finance options. The ecosystem may be made resilient to such uncertain events and it should be ensured that businesses may be rescued even in such dire circumstances. An example of such support can be found in the steps taken by the Government and IBBI during the past 3 years.

So, resolving insolvency should not be understood as an absolutely linear process and the RP from time to time will have to take on additional tasks not expressly contemplated under the law to ensure that the business is kept running. If the business cannot be kept going, resolving insolvency by way of CIRP will be futile and liquidation shall be resorted to.

Also Read: 3-day online course on Evolving Paradigms of Insolvency and Bankruptcy Code