What happens after corporate default : CIRP explained to a 10-year-old
Introduction
What happens after a company just simply stops paying its dues i.e. defaults? While investors panic and shareholders hold their heads, the IBC kicks into gears. The Insolvency and Bankruptcy Code, 2016[1] (“IBC”) provides a structured mechanism to solve such problems, known as the Corporate Insolvency Resolution Process (or “CIRP”). The goal is to prioritize preservation of the company from going bankrupt or into forced liquidation.
This blog breaks down what exactly happens after the initiation of CIRP and walks the reader through the entire process beginning with prerequisites to the implementation of a resolution plan in a stage-by-stage, systemic and simplified manner.
Stage One – Default as Trigger of CIRP
Section 3(12) of the IBC defines “default” as non-payment of any debt when any part of it becomes due; a default of more than Rs. 1 crore can trigger the CIRP under Section 4 (earlier, this limit was Rs. 1 lakh but was changed owing to weak financial conditions of businesses during the COVID-19 pandemic). Once a default occurs, three types of parties (or “creditors”) can trigger the process specifically, Financial Creditors (under Section 7), Operational Creditors (under Section 9) or the Corporate Debtor itself (under Section 10).
These people can independently or jointly, file an application before the National Company Law Tribunal (NCLT) which is the adjudicating authority for Insolvency matters. If the application meets basic criteria i.e. the existence of default, evidence, and proper documentation, the NCLT must admit it and formally initiate the CIRP.
Stage Two – Admission by the NCLT and Moratorium
If the NCLT is satisfied that the default is existent, genuine and satisfies all the requirements given under the IBC, it has to admit the application, which formally marks the initiation of CIRP. This order from the NCLT leads to a public announcement of the CIRP along with two other major consequences:
- Appointment of the Interim Resolution Professional (IRP)
An IRP is appointed by the NCLT as per Section 16 of the IBC, and the management of the company, in its entirety is transferred to him. The board of directors is suspended. The IRP is now in control and is entitled to collect claims of all the creditors, safeguard the assets of the company and create a Committee of Creditors (“CoC”).
- Declaration of Moratorium
A Moratorium is declared under Section 14 of the IBC. The moratorium is basically a freeze on all legal proceedings against the corporate debtor. No new proceedings can be filed, no assets can be seized under SARFAESI and no judgement, decree, order etc. can be executed against the corporate debtor. This is designed to give a breathing room for resolution without any legal or procedural delays.
Hence, from this point onwards, the company no longer stays in hands of the directors/ partners but is transferred in the hands of the Interim Resolution Professional
Stage Three – Claims, CoC and Resolution Professional
Once the Interim Resolution Professional (IRP) takes over, all the creditors to whom the corporate debtor owes any debt are brought in. The idea is to let the people who are owed money to decide how they intend to get that money back while saving the company, if possible. This happens in some steps:
- Public Announcement & Invitation of Claims
A public announcement is made in accordance with section 15 of IBC, usually through a newspaper notice, inviting all creditors to submit their claims. These include financial creditors, operational creditors, employees, workmen, and anyone else who thinks that the corporate debtor owes anything to them.
The IRP verifies each claim and prepares a list of admitted claims. This step ensures that only legitimate creditors can take part in the CIRP.
- Formation of the Committee of Creditors (CoC)
The CoC is formed in accordance with Section 21 of the IBC, exclusively for financial creditors, as they have the highest stakes. Operational creditors may also attend meetings if the amount owed to them is significant, but they don’t have voting rights unless there are no financial creditors.
In this meeting, the CoC confirms or replaces the IRP with a full-time Resolution Professional (RP). They also start planning out further plans e.g. whether to approve a resolution plan or just head towards liquidation.
Thus, the actual power shifts. The RP becomes a mere pseudo-head, but the actual powers come to the CoC. Every key decision, from resolution plan approval to liquidation, now needs a 66% majority vote of the CoC.
Stage Four – Resolution Plan
Now, when the Committee of Creditors is set up, the Resolution Professional invites resolution plans from potential applicants, these could be rival companies, private investors, or even the company’s promoters (if eligible under Section 29A of the IBC). The plan must have provisions to revive the company and repay the creditors fairly.
If a plan gets approved by a 66% majority of the CoC, it’s sent to the NCLT for finality. If no plan is given or approved within 330 days, or if all plans fail, the company heads into liquidation, its assets are sold, and the revenue is distributed as per the waterfall mechanism under Section 53 of the IBC.
Stage Five: Liquidation if no Resolution Plan is approved
If no viable resolution plan is approved within the provided 330 days or if the CoC itself chooses to sell the company, it enters into liquidation. A liquidator who is usually the Resolution Professional is appointed to sell or auction off the company’s assets.
The earnings from the sale are then distributed using the waterfall mechanism under section 53 of the IBC which gives the provision for distribution of assets after liquidation, ensuring a structured, fair payout with insolvency costs and workmen’s dues prioritized, and shareholders last in line.
Once all assets are liquidated and dues are settled, the company is officially dissolved by the NCLT on record, and it is marked as being wound up, which marks the legal end of its existence.
Waterfall Mechanism
The IBC’s waterfall mechanism under Section 53 gives down priorities of payments in liquidation: first priority is given to process and liquidation costs, then workmen’s dues and secured creditors, followed by employees, unsecured creditors, government dues, remaining debts, and then finally, shareholders of the company.
Conclusion
A company’s default doesn’t just trigger financial panic; it sets in motion a structured legal process with tangible consequences. Under the IBC, once the default crosses ₹1 crore, the response is swift, accountable, and time bound. Control shifts from promoters to professionals, and creditors take the lead. The focus is on revival, but if that fails, the liquidation process still manages to ensure a fair distribution of whatever value remains. In doing so, the IBC doesn’t just merely handle corporate collapse, it reshapes how we deal with it, with clarity, urgency, and balance.
[1] The Insolvency and Bankruptcy Code, Act No. 31 of 2016
This post is written by Mr. Kushagra Sharma, Student at Chanakya National Law University, Patna.