Don’t fight it (CIRP)out! You may lose the war

Updated: May 26, 2021

It is a very difficult task for a promoter, who had nurtured and cherished a lifetime dream of building his own empire, to accept the fate of his organization when it is under the insolvency proceedings. So, obviously, the basic instinct of the promoters of a debt laden company, in the first instance, is to resist it at any cost. No one can blame them for that, as that will be the very natural response from anyone who may face such situation .

As a promoter or entrepreneur of a business, he will be the first person to smell the rat before anyone else started sensing the presence of a mammoth in his room. The wise men had taught us that a stitch in time saves nine. If the promoter is capable to identify the presence of the smelly rats roaming around him and if he can take adequate steps to get rid of them in a proper and timely manner, then the whole story may take a different turn to end it up in a “lived happily thereafter” climax. So, the first step to deal with insolvency proceedings is to accept the situation, admit the fact and take corrective measures to save the ship from sinking. At that stage, there will be plenty of options available in front him to save the ship such as cost reduction, corporate restructuring, loan restructuring, takeover of the loan, inviting a new set of investors, exit from the shareholdings etc. If he ignores the early symptoms then the insolvency begins and the same shall soon lead him to eventual bankruptcy.


Corporate Insolvency Resolution Process (CIRP) is a time bounded process, which got triggered on an application filed by a Creditor. On admission of the said application by the National Company Law Tribunal(NCLT), the clock will start ticking till it reaches a natural stop on 180th day. The said 180 days are very crucial for the successful turnaround of the process. During the said period, the Resolution Professional shall have to perform various roles envisaged by the Code such as making of public announcement, invitation of the claims, verification of claims, constitution of committee of creditors, appointment of registered valuers, preparation of information memorandum, invitation of expression of interest from interest bidders, verification and finalization of plans etc in a highly time bound manner. Apart from the above, he is responsible to manage and operate the business of the company as a going concern by stepping into the shoes of the promoter, with an intention to preserve the value of its assets.


If you observe the timelines of the Insolvency Proceedings happening in India under the IBC, you can see that most of the CIRP matters are dragged to the courts by the promoters with an intention to stall the process. By attempting to stall the process, the Resolution Professional is losing the golden hours to breath a fresh life to the drowning entity and the promoters are, unknowingly, preparing the death bed for performing its last rituals. In many cases, the due to the non-cooperation of the promoters, the valuers are unable to identify the actual value of the asset and often the committee ends up in losing its time to invite fresh plan in the absence of a viable plan. In some cases, the promoters are getting misguided by their counsels and due to that reason they start seeing an enemy in the Resolution Professional.


By extending whole-hearted cooperation to the Resolution Professional, the promoters can help him to unlock the actual value of the assets and thereby ensure maximum value for the same. But unfortunately, the situation is quite different in many cases. The promoters will fight the CIRP using their tooth and nail, till the last moment but to fail, which often result in a heavy damage to them at the end of the process. The Code provides amble opportunities to the promoters to gain back the control of the Corporate Debtor, if they qualify the conditions stipulated under Section 29A of the Code. But even in such cases, the promoters often come up with very flimsy proposals backed with total misrepresentation, falsehoods and blatant lies and present it without any financial backing. The Resolution Professional or the Committee of Creditors cannot accept such ‘indecent proposals’ considering the stringent timelines they have to observe under the Code. In the matter of DHFL, the Honb’le NCLAT(Appellate forum) has stayed an order by the NCLT, which had directed the lenders to consider the offer made by the promoter, Mr. Kapil Wadhwan, which, in the opinion of the Creditors were built up on flimsy falsehoods and unashamed lies. It clearly reflects the intent of the legislature.


I recently wrote on the topic ‘plight of the promoters who are personal guarantors to the corporate debtor’ and tried to establish the damage that can be caused to them if there is a shortfall in the value approved by the Committee while considering the resolution plan. In such circumstance, the promoters may lose their personal assets also which is a sad situation from their view point. In order to prevent such situations, in my opinion, the promoters have to extend their full support and cooperation to the process from the very beginning and thereby enable the Resolution Professional to extract the best out of the process before the clock stops ticking!


Bijoy P Pulipra

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