Streamlining Insolvency: Evaluating The Dual-Stage Approval Process For Corporates

Shourya Sharma and Sharan Sai Pokuru*

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INTRODUCTION

The Indian Government has left no stone unturned to enhance the Ease of Doing Business in the country. The results are evident, as India has registered a leap of 79 ranks in the World Bank’s Ease of Doing Business rankings between 2014 and 2019. Scholars have given due credit to the introduction of Insolvency and Bankruptcy Code, 2016 (‘IBC’) for this remarkable improvement. From a time when the average period for insolvency resolution mechanism under the erstwhile legal regime in India exceeded 4.3 years to an average of less than 2 years in 2023-24, the IBC is, by and large a successful economic and legislative experiment.

However, this does not account for the frequent delays in the Corporate Insolvency Resolution Process (‘CIRP’), which is to be ‘mandatorily’ completed in 330 days post admission as per Section 12 of the IBC. The grim reality is that over 76% of the cases have exceeded a year. Further, 56 percent of such cases have exceeded 3 years, highlighting inefficiencies. This is exemplified by the CIRP of Reliance Communications Infrastructure Limited, where the process commenced on 25th September, 2019 but culminated in approval of the Resolution Plan (‘RP’) only on 19th December, 2023- spanning over a period of more than 4 years. In this light, the Insolvency and Bankruptcy Board of India (‘IBBI’) published a discussion paper on 4th February, 2025 in which, among other things, it proposed to “amend the CIRP regulations to empower the Committee of Creditors to request the Adjudicating Authority for a two-stage approval process of resolution plans where the financial bid and basic implementation framework may be approved early”.

This was also proposed in an earlier discussion paper from 2023, signifying the IBBI’s clear intention to evolve the insolvency ecosystem into a more dynamic and time-sensitive mechanism. The crux of the IBBI’s rationale for this proposition lies in its aim of mitigating the adverse effects of prolonged delays in the CIRP by allowing early operationalisation of the RP.

The existing literature widely recognises the doctrine of commercial wisdom of the Committee of Creditors (‘CoC’) for value maximisation of the distressed assets. The IBC marked a paradigm shift from a ‘debtor in possession’ to a ‘creditor in control’ model. The proposition by IBBI aligns with these principles by empowering the CoC to operationalise the RP at a timely stage and attempts to serve a solution to the delays accompanying the CIRP. The academic literature highlights high volume of insolvency cases, insufficient resolution mechanisms, and disappointing recovery rates for creditors in India. It appears that the proposition is novel in its approach and aligns with other reforms, such as Fast Track CIRP and Pre-Packaged Insolvency Resolution Process, all of which aim at speedy resolution of distressed assets. Taken together, these reforms further their common objective of expediting the otherwise prolonged CIRP.

Against this backdrop, the present article begins by evaluating the differences between the current process for approval of the RPs and the proposed dual-stage approval framework. Subsequently, it discusses the potential benefits of the proposal and the challenges that follow for various stakeholders. Finally, it explores the solutions that counterbalance the benefits with the concomitant challenges, so that this dual-stage approval framework can attain greater sustainability.

COMPARING THE CURRENT AND PROPOSED RESOLUTION PLAN APPROVAL PROCESSES

The current insolvency resolution mechanism follows a single-stage approval process governed by Section 30 and 31 of the IBC. Under Section 30(4), the RP must obtain the minimum threshold of 66% votes in the CoC to gain approval. Thereupon, Section 30(6) requires the Resolution Professional to submit the same to the Adjudicating Authority (‘AA’)- the National Company Law Tribunal (‘NCLT’). It is only if the AA approves such RP under Section 31(1), that it becomes binding.

In contrast, the IBBI discussion paper has taken note of the concerns regarding the value erosion of assets between the submission of the RP and the pending approval before the AA. Accordingly, it proposes a dual-stage approval process of the RP, wherein the first stage would only entail approval of the financial bid and basic plan, including the feasibility, implementation framework, and takeover terms. Once this is provisionally approved by the CoC and submitted to the AA, the successful Resolution Applicant (‘RA’) can take over the operations of the Corporate Debtor (‘CD’) and start running it. The second stage would then separately deal with inter-creditor disputes and other contentious matters that may arise in the course of implementation, thus not impeding the operational execution of the RP in any manner.

POTENTIAL BENEFITS OF THE DUAL-STAGE APPROVAL PROPOSAL

The core issue in the current IBC regime lies in the delays in the insolvency process and the airline industry is a prime example of the same. In the recent saga of insolvency resolution of Jet Airways India Limited, the Supreme Court (‘SC’) exercised its special powers under Article 142 to choose liquidation over resolution for the airline, as the RP took inordinately long to be implemented. Similarly, in the case of Go First Airways, the NCLT ordered liquidation in January 2025, after no viable revival option emerged and significant time had lapsed since the admission of the application under Section 10 of the IBC in May 2023. The NCLT Mumbai has also observed that if the implementation of the RP is delayed, in addition to value erosion of the CD, it precludes the creditors from pursuing other potential avenues. Not only this, but it is also common for a RP to include combinations within the meaning of Competition Act, 2002. In such a case, the RP must be approved by the Competition Commission of India (‘CCI’) before it can be presented before the CoC, thereby increasing the complexities during the CIRP by many-folds. Furthermore, in the Essar Steel case, the SC had clarified that the timeline for CIRP is not strict and can be extended if warranted by circumstances, highlighting a liberal approach by Indian Courts. As a corollary, the RA and other bidders would be dissuaded to quote rewarding proposals in the context of such looming uncertainties. This entire cycle is against the very foundation of the IBC which focuses on “insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons”. Thus, structural reforms are much-necessitated to fulfil the objectives of IBC by all metes and bounds.

In this regard, the IBBI proposed dual-stage approval emerges as a beacon of hope. Critically, it revises the functionality of the entire approval process such that the RA gets immediate control over the failing business of the CD. Naturally so, the RA would be incentivized to manage the operations of the company and be a successor to CD’s business. If runs successfully, the business of the CD would regain momentum, and the valuation of its assets would be maximised to the optimum levels. Equally, this fuels investor confidence by providing operational certainty to the RA. This would also minimize litigation bottlenecks while the RA could work towards successful operationalisation of the plan. Consequently, the competitors in the bidding would make compelling financial offers, thereby making the creditor recoveries more possible. This is because early operational control under the proposed dual-stage approval framework significantly reduces uncertainty for RAs and they do not have to factor in the deterrents and associated costs. Due to this, the prospective bidders are encouraged to observe the distressed asset as a viable, lower-risk investment. This supports the very ethos of the IBC by sustaining economic activity of the CD, thereby representing a forward-thinking reform.

INTRICATE CHALLENGES IN IMPLEMENTING THE DUAL-STAGE APPROVAL FRAMEWORK

As merits and demerits are two sides of the same coin, the proposal under discussion has its own share of challenges with benefits that warrant attention of the IBBI. At the outset, it is bound to face scrutiny on the ground of it being ultra vires to the parent legislation, that is IBC. The IBBI is a regulatory body that derives its authority to frame regulations under Section 196 of the IBC. Thus, the question arises whether it is possible for IBBI to make a law that is inconsistent with the law contained in IBC? There appears a direct inconsistency between the statutory scheme contained in Sections 30 and 31 of the IBC, and the law-to-sought to be in the IBBI proposal. This is because, while the former requires a single-stage RP approval process, the latter allows for a dual-stage approval model, thereby significantly deviating from the statutory procedure envisaged under the IBC. This falls foul of the well-settled Doctrine of Ultra Vires, that propounds a subordinate legislation cannot be inconsistent with the Parent Act. The only conceivable way to withstand this scrutiny of law would be by showing that the proposal advances the objectives of the IBC that are necessary and integral to its effective implementation- the threshold for it being stringent. Thus, the survival of the law from this proposal might remain a preliminary challenge in itself, albeit it being surmountable by reasonable explanation.

Another concern is the risk of protracted litigation, opening floodgates for the AA. The primary issue is that if the RA would begin operationalisation of the business of the CD, third-party rights and liabilities may accrue in its favour, which is completely unfound in the existing framework under Sections 30 and 31 of the IBC. To exemplify this understanding, consider a situation where the RA enters into long-term supply agreements with vendors or financiers after the Stage 1 approval. Subsequently, if the RP is sought to be challenged at Stage 2 by the creditors, the RA would inevitably be in a precarious position to decide whether to continue with the RP or completely invalidate it. On that basis, legal action would be prompted either by the third-party vendors (to protect their contractual interests) or by the creditors (to prevent plan dilution). Thus, litigation to the AA could arise at both the stages of such dual-stage approval model, leading to influx of cases to the already burdened AA.

Furthermore, given that the RA is already in control of the CD’s business, it would be difficult for the AA to discredit that, making the implementation and the subsequent distribution to creditors highly difficult to challenge. Once control has shifted, any judicial intervention risks disrupting operations, thereby constraining the AA from intervening meaningfully. This is particularly detrimental to the dissenting creditors, ultimately negating the efficiency gains that the proposal seeks to achieve by creating an asymmetry between the RA and creditors.

More pertinently, from a purely operational perspective, if the RA is actually or putatively undergoing financial challenges, it could push for renegotiation on favourable terms. It could very conveniently cite financial reasons or cash flow problems or changes at macro-economic level to attempt such renegotiation. Economist John Moore’s theory of ‘Incomplete Contracts’ argues that when agreements leave contingencies open, parties behave opportunistically. Thus, as the AA has not given sufficient conclusivity to the RP, unlike the current law, the creditors would be perceptively bound to accept these such terms- often under economic duress or in order to prevent further delay and value erosion. Unfortunately, this provides the RA an undue strategic advantage and is thus antithetical with the very rationale for creditor in control model highlighted in landmark judgments such as Essar Steel. Thus, the creditors would be sidelined in the RP that they had approved in the long run, which again paints a rather problematic picture.

PROPOSED SOLUTIONS AND RECOMMENDATIONS FOR EFFECTIVE IMPLEMENTATION

This problem of balancing speed and fairness is not unique to India and is rather a common thread across jurisdictions. For instance, the intricate nature of Chapter 11 of the U.S. Bankruptcy Code is illustrated with the case study of JOANN Fabric and Crafts. It filed for bankruptcy twice within a year, ultimately deciding to close all its stores due to unsuccessful restructuring efforts. This highlights a system plagued by lengthy timelines and chronic delays in U.S. Similarly, the Pre-Pack Administration in U.K. has been a matter of controversy, as while pre-packs can be efficient, akin to the dual-stage approval framework in question, they require careful handling to balance the interests of all parties involved. In a similar vein, in the Indian Context, IBBI must arrive at a delicate balance- ensuring fairness with speed in the law respecting approval of RP before the AA.

To address these challenges, an escrow-based mechanism can be established, to ensure that the RA works with a real intent to follow through the CIRP. Critically, it was mentioned in a 2023 discussion paper that the disputed distribution amounts be kept in an escrow account pending final adjudication. This ensures liquidity infusion is balanced with ring-fencing of contested claims. In the event that the RA attempts to back out or renegotiate the terms, the appropriate sum can be ascertained and released to the concerned parties as per the RP. This would protect the creditors by ensuring that RA has financial skin in the game, and it honours its original bid. A similar mechanism by object exists in the current approval system. The Regulation 36B(4A) of the CIRP Regulations provide that in case the RA significantly contributes to failure in implementation of an approved RP, then the performance security shall be forfeited.

Further, to alleviate the risks of creditor discontent and litigation, IBBI can prepare detailed guidelines in exercise of its authority engrafted by Section 196 of the IBC for real-time communication during the implementation of the RP. Such real-time communication would entail periodic disclosures about implantation of milestones, status of pending disbursements and other essential CoC details over digital dashboards or other similar means. The effect would be that the stakeholders remain conversant and engaged with the process, thereby instilling a sense of all-important confidence in the implementation of the RP.

As the proposal is designed to be a discretionary measure for the creditors (that is, creditors can opt to pursue the current or proposed approval process), the IBBI can prepare a separate independent panel to confirm a certain degree of oversight on the RP during the first stage itself, thereby making the entire CIRP more equitable to the creditors and deter opportunistic behaviour at the end of the RA. This institutional check would balance the early transfer of control with the legitimate concerns of the CoC and summarily reinforce greater trust in the CIRP.

CONCLUDING REMARKS

In view of the foregoing, the proposed dual-stage model for approval of the RP during CIRP is not a run-of-the-mill routine change. Instead, it is a promising solution to the existing inefficiencies for approval by AA. This catalyses the operationalisation of the business of the CD, emerging as a novel concept to maximise the value of the assets in a time-bound manner. It carries the potential to solve the problem of prolonged delays in the CIRP.

However, as pointed out, these benefits are not without challenges that must be counterbalanced by the IBBI for meaningful realisation of the ends sought by this proposal. The risk of strategic bidding by RAs and protracted litigation are to be addressed carefully. These challenges, if left unaddressed, would be detrimental to the objectives of IBC and make the policy proposal counter-intuitive.

Ultimately, the success of the proposed dual-stage model hinges on two simple yet difficult to harmonise variables- fairness and speed. If implemented thoughtfully and meticulously, this policy proposal is expected to contribute significantly to the insolvency law jurisprudence, making India emerge as a torchbearer for investment circles around the globe.

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 *The authors are third-year students at Jindal Global Law School (JGLS).