Difference Between CIRP and Liquidation

The Code of Insolvency and Bankruptcy, 2016 (IBC) was enacted in India to streamline the process of corporate insolvency resolution and liquidation, which are major helping hands for the process of insolvency resolution and liquidation. It provides a structured framework to resolve financial distress efficiently while maximizing asset value. The two primary processes under the IBC are the Corporate Insolvency Resolution Process (CIRP) and other is liquidation. While both serve the objective of resolving insolvency, they differ significantly in terms of process, objectives, and outcomes.

This article will discuss the various differences between CIRP and liquidation, their definitions, legal framework, processes, key stakeholders, implications for creditors and debtors and various other aspects of the processes.

What is CIRP?

The Corporate Insolvency Resolution Process (CIRP) is a mechanism that allows financially breakdown companies to restructure or reframe their liabilities and operations to revive themselves in the corporate landscape; basically, it works as a helping hand for the stabilization of the company condition. The objective is to keep the company as a going concern while ensuring that creditors receive their dues in a fair and transparent manner.

Legal Framework

CIRP is governed by the Insolvency and Bankruptcy Code, 2016 (IBC) and regulated by the Insolvency and Bankruptcy Board of India (IBBI). The National Company Law Tribunal (NCLT) is the adjudicating authority responsible for overseeing the process.

Initiation of CIRP

CIRP can be initiated by:

• Financial Creditors (Banks, financial institutions, etc.) under Section 7 of the IBC.
• Operational Creditors (Suppliers, vendors, etc.) under Section 9.
• Corporate Debtors themselves under Section 10.

The NCLT admits an application if there is a default of at least INR 1 crore (subject to periodic amendments).

Process of CIRP

1. Admission of Application: The NCLT admits the application for CIRP if the conditions under the IBC are met.
2. Moratorium: Upon admission, a moratorium is declared, halting legal proceedings, enforcement of security interest, and asset transfers.
3. Appointment of Interim Resolution Professional (IRP): The IRP takes control of the company and forms a Committee of Creditors (CoC).
4. Evaluation of Resolution Plans: Prospective resolution applicants submit plans to revive the company.
5. Approval of Resolution Plan: The CoC votes on the resolution plan, requiring at least 66% approval.
6. Implementation: If the NCLT approves the resolution plan, the company will continue under the new management.
7. Failure of CIRP: If no resolution plan is approved within 330 days, the company proceeds to liquidation.

Outcome of CIRP

• If a resolution plan is approved, the company will continue its operations.
• If no viable plan is found, liquidation is initiated.

What is Liquidation?

Liquidation is the process of winding up a company and selling its assets to repay creditors. It is the final step when CIRP fails or is not feasible. The primary goal is to maximize value realization from the company’s assets and distribute proceeds in a predefined order.

Legal Framework

Liquidation is governed by Chapter III of the IBC. The process is overseen by a liquidator appointed by the NCLT.

When is Liquidation Initiated?

• If no resolution plan is approved during CIRP.
• If the CoC decides to liquidate the company before CIRP completion.
• If the resolution plan is not implemented properly.
• If the company violates the terms of an approved resolution plan.

Process of Liquidation

1. Appointment of Liquidator: The NCLT appoints a liquidator to oversee asset realization.
2. Public Announcement: The liquidator invites claims from creditors.
3. Asset Valuation and Sale: Assets are valued and sold through auctions.
4. Settlement of Claims: Creditors are paid as per the waterfall mechanism.
5. Dissolution of Company: After claims are settled, the company is dissolved by an NCLT order.

Outcome of Liquidation

• The company ceases to exist after dissolution.
• Creditors are paid based on priority under Section 53 of the IBC.
• Shareholders may receive proceeds only if all debts are settled.

Key Differences Between CIRP and Liquidation

• Objective -Revive the company as a going concern Sell assets and dissolve the company.
• Outcome- The company will continue operations if the resolution plan is approved. The Company is dissolved and ceases to exist.
• Legal Basis- Sections 7, 9, and 10 of the IBC Section 33 of the IBC.
• Governing Authority -NCLT and IBBI NCLT and Liquidator.
• Stakeholders Involved- Resolution Professional, CoC, NCLT, prospective bidders Liquidator, Creditors, NCLT.
• Time Frame- 180 days (extendable to 330 days) No fixed timeline, depending on asset realization.
• Decision-Making Body- Committee of Creditors (CoC) Liquidator.
• Moratorium- Imposed upon admission No moratorium, only asset control by liquidator.
• Role of Creditors- Creditors vote on resolution plans Creditors file claims and receive payments
• Asset Utilization- Used for business revival Sold to repay debts

Implications for Stakeholders

For Creditors

• CIRP: Higher chances of recovering dues through restructuring.
• Liquidation: Recovery depends on asset sale; unsecured creditors get minimal recovery.

For Employees

• CIRP: Employees may retain jobs if the company is revived.
• Liquidation: Employees lose jobs; unpaid wages are prioritized in payouts.

For Promoters

• CIRP: Loss of control but possible business survival.
• Liquidation: Loss of business; assets are liquidated.

For Investors

• CIRP: Investment may continue if the company is revived.
• Liquidation: Investment is lost as the company is dissolved.

Conclusion

CIRP and liquidation serve entirely different purposes as per the circumstances under the regulation of IBC. Both are the welfare processes for the company, but they depend upon the circumstances of the company; both processes are the helping hand to stabilise the company in a just and fair manner as per the regulations of the code. CIRP aims to revive or rehabilitate the companies which are financially distressed, by allowing them to continue operations in the stable manner, basically it works as a helping hand in the tough situations of the company management by letting the company to come back into the stable positions to run their organization. The process of liquidation, on the other hand, is the last resort when revival is not feasible to make the company stable. Then, it comes into the picture, and the liquidation process is followed to wind up the company and repay assets and other miscellaneous things. Understanding these differences is essential for stakeholders to make wise and well-informed decisions regarding insolvency proceedings.

The success rate of CIRP primarily depends on the timely resolution and investor interest; if the resolution takes place in a time-bound manner, then automatically, the interest of investors will be protected and secure, while liquidation ensures that assets are distributed fairly among creditors as per their contribution per cent of shares. Ultimately, the choice between CIRP and liquidation depends on the financial condition and circumstances of the company, creditor consensus and market conditions and various other financial conditions. It’s highly advisable to consult with a legal and financial expert to understand the knowledge of legal provisions of the process of CIRP and liquidation to make well-informed decisions and to avoid unnecessary complexities.

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