CIIRP and the Debtor-in-Possession Model: A Structural Paradox

[Divyanshi and Vanshika are students at Rajiv Gandhi National University of Law.]

The Insolvency and Bankruptcy Code 2016 (IBC) is the primary law governing corporate bankruptcy and resolution. The main process is the corporate insolvency resolution process (CIRP). Until 2026, it was the only way to initiate a corporate insolvency process. The process can be initiated in the event of any default committed by the corporate debtor, with a minimum default amount of one crore rupees. Thereafter, an application is made to initiate CIRP against a corporate debtor (CD) and filed before the Adjudicating Authority, i.e., the National Company Law Tribunal (NCLT). Once the application is admitted by the NCLT, a moratorium under Section 14 of the IBC is automatically triggered. The management is vested in a resolution professional (RP), and a committee of creditors (CoC) is constituted to drive the resolution process towards a viable resolution plan.

Despite these structural advances, the operation of the code exposed significant fault lines such as delay in decision, excessive litigation at the admission stage, over-burdening of the NCLT, complete removal of management of the company, etc. In order to overcome these operational challenges, the Insolvency and Bankruptcy (Amendment) Act 2026 (2026 Amendment Act) introduced the Creditor-Initiated Insolvency Resolution Process (CIIRP). It establishes an alternative insolvency resolution process for companies, in addition to the existing CIRP framework. CIIRP resembles the debtor-in-possession (DIP) model under the US Bankruptcy Code. The authors intend to analyse the CIIRP framework by positioning it against the US DIP model and examining the institutional shortcomings. 

Overview of the CIIRP Framework

The 2026 Amendment Act has introduced Chapter IV-A (Sections 58A-58K), which establishes a creditor-initiated insolvency proceeding that operates entirely outside the traditional court-admission framework. CIIRP can only be initiated by specified financial creditors, as prescribed under Section 58B, who cumulatively hold 51% of the aggregated debt. The process starts when the specified financial creditors appoint an RP and serve notice on the CD within a mandatory thirty-day pre-commencement window. Upon expiry of this notice period, the RP publishes a public announcement marking the formal commencement date; notably, no NCLT order is required at this stage, distinguishing CIIRP fundamentally from CIRP, where court admission is a prerequisite. The debtor retains a 30-day window post-commencement to challenge the process before the NCLT, which may then either declare the process void ab initio, if no default is substantiated, or convert it into a formal CIRP if procedural violations are identified despite a proven default. 

On the operational front, the CIIRP must complete the insolvency resolution within 150 days from commencement. A single extension of up to 45 days can be granted by the NCLT, but only when it receives an application from the RP with at least a 66% voting share of the CoC.

Under the CIIRP, the board of directors or partners remain operational in management, in line with the debtor-in-possession model, with the RP exercising only veto power at board meetings rather than exercising direct control. The moratorium protection is optional under CIIRP, applicable only when the RP makes a discretionary application to the NCLT. The framework lays down the following conditions under which CIIRP will automatically be converted into formal CIRP: when the RP is unable to complete the process, encounters non-cooperation, or no plan is accepted within the mandatory timeline. This is to ensure that this accelerated pathway functions as an entry point rather than a terminal mechanism. 

These features represent a clear shift from the traditional insolvency framework. Yet the question is whether this structure, which seems similar to the DIP framework, can provide the institutional safeguards found in the actual DIP model.

CIIRP and DIP Model: A Structural Paradox

Section 58F of the 2026 Amendment Act has facilitated an out-of-court, debtor-in-possession resolution mechanism. Under this mechanism, the existing management retains control of the business during the insolvency and restructuring proceedings. This concept is foundational to Chapter 11 of the US Bankruptcy Code. The analogy, however, is structurally incomplete. Under 11 U.S.C. § 1107, the debtor-in-possession operates as a trustee-fiduciary, subject to continuous Court and US Trustee oversight, and files monthly operating reports and accounts for the estate property. In Wolf v. Weinstein, it was held that the corporation bears essentially the same fiduciary obligation to creditors as a trustee, so long as the debtor remains in possession and these responsibilities fall personally upon the officers and managing employees. This principle formally places the debtor-in-possession in the position of a trustee-fiduciary. This judicial principle was subsequently codified by Congress in 11 U.S.C. § 1107, expressly citing Wolf v. Weinstein as its foundational authority.

Critically, the US model pairs this continuous oversight with a compensating incentive structure. Key employee retention programs often have been utilised to obtain cooperation from management and/or employees by offering bonuses or retention payments that are contingent upon performance or continued employment for a fixed period of time. More fundamentally, the “new value” exception to the Chapter 11 absolute priority rule allows current equity shareholders to retain or regain their equity interest in the reorganized company under limited circumstances even in the face of objections from senior creditors, and provides equity with a reasonable chance of ownership. Incentives align when management truly believes there is a viable option to keep or recapture ownership: When management believes that it can see a realistic path to keeping or regaining ownership, it has an incentive of its own to pursue value-maximising restructuring. That is why the DIP model is based on two incentives: judicial supervision and contractual/court sanctioned incentives for cooperative behaviour and successful reorganisations. 

DIP only works when management has an interest in the reorganised entity. In the US Chapter 11 model, this is addressed by the new value exception which allows equity retention if promoters bring in key capital and put themselves to the test of the marketplace.  If there is no possibility of ownership recovery, the promoter-owner faces the "outside option problem"; the outside option being the payoff available if negotiations with creditors break down and the firm proceeds to liquidation: which leads to a situation the costs of cooperation are higher than the benefits of a potential outcome of ownership loss. Unfortunately, CIIRP does not have a similar mechanism as Section 29A explicitly bars promoters, who are NPAs for 12-month period prior to commencement, from presenting resolution plans and provides no remedy for seeking ownership. This approach leads to non-cooperation, asset depletion, and loss of going-concern value.

This breaks the DIP model's foundational premise, which is that owner-managers rationally minimize effort under any level of cooperation when they have a certain exit. The legislation offers only a secondary incentive, which defers rather than prevents ownership loss.

In contrast, US Chapter 11 allows the retention of equity except in the cases of fraud or gross mismanagement. Further equity can be negotiated through a necessary capital contribution. Default doesn't qualify as a disqualification. This retention option, combined with constant supervision, is what makes DIP effective. This is the architecture that is abandoned by CIIRP. It maintains management control without offering recovery avenues for the owner and eliminates the incentive alignment that allows debtor-in-possession reorganisations to work.

A further structural weakness compounds this problem. Unlike the Chapter 11 framework, which requires the debtor in possession to submit monthly operating reports, detailed accounting requirements to the Office of the United States Trustee, etc., there is no such requirement under CIIRP. Under CIIRP, while the RP may attend board meetings and veto resolutions detrimental to the CIIRP, these specific powers are subject to further conditions and rules to be specified by the Central Government. The statute does not define the standard or threshold against which the veto is exercisable, leaving its scope uncertain and subject to litigation. This is a reactive power and not a continuous supervisory mandate. This creates a structural moral hazard: management retains full executive authority precisely when it has the greatest incentive to favour related parties or to dissipate assets.

Conclusion

The CIIRP mechanism is formulated to imitate DIP model and reflect a shift towards a more structured, time-bound and commercially aligned insolvency framework, in consonance with US Chapter 11 framework, but the comparative analysis reveals substantial disparities in the adoption of the said framework. The existing management has retained control of the business during the insolvency and restructuring proceedings, but the substance that renders the mechanism operational, in the literal sense, has been left unaddressed. Two major structural discrepancies underpin the present position. 

The first structural discrepancy concerns incentives. Section 29A of the CIIRP mechanism entirely precludes the possibility of equity retention for the promoters whose accounts have been classified as NPAs, leaving them with no incentive to cooperate after the default has occurred. This creates the same behaviour predicted under the outside option problem. The appellation of DIP persists but the rational incentive to act as a careful possessor dissipates.

The second structural discrepancy is concerned with oversight. The substitution of routine oversight mechanisms under Chapter 11 in the form of trustee-fiduciary relationship with RP’s reactive veto power at board meetings without describing its scope and threshold is a feeble substitute for continuous fiduciary oversight, particularly at the very moment when management has the strongest incentive to dissipate assets or favour related parties.

Considered collectively, these structural discrepancies suggest that CIIRP has imported the framework of debtor-in-possession resolution mechanism but has overlooked the two major pillars that make this architecture function viably: a credible incentive for the debtor to cooperate, and a robust mechanism to monitor the debtor if it does not. Until such measures are implemented, CIIRP risks functioning as a faster resolution mechanism adopting the nomenclature of DIP in the absence of the institutional safeguards that make it work.