Creditor Led Resolution Process: One Step Forward, Two Steps Backwards?

[Harshil is a student at Dr Ram Manohar Lohiya National Law University.]

The Insolvency And Bankruptcy Code (Amendment) Bill 2025 (Amendment Bill 2025) introduced in the Lok Sabha on 12 August 2025 aims to amend the Insolvency and Bankruptcy Code 2016 (Code), and reduce delays, maximize value for all stakeholders, and improve governance of all processes under the Code, by introducing new provisions which follow global best practices for resolving insolvency, as evident from the Statement of Objects and Reasons of the Amendment Bill 2025. 

The Code stands revolutionized India’s insolvency framework by consolidating laws relating to reorganization and insolvency resolution, in a time-bound manner aimed to ensure asset value maximization, credit availability, and balance stakeholder interests. The present frame under the Code allows for three distinct resolution processes, namely the creditor initiated resolution process (CIRP) under Chapter II of the Code, which can be initiated by financial creditors (FCs), operational creditors and corporate debtor (CD) itself. The pre-packaged insolvency resolution process under Chapter III-A of the Code for CD classified as micro, small or medium enterprise and fast-track corporate insolvency resolution process (FCIRP) under Chapter IV of the Code.

The Amendment Bill, 2025 proposes a creditor-initiated insolvency resolution process or creditor-led resolution process (CLRP), with an out-of-court, creditor initiated mechanism for business failures to facilitate an expedited and cost-effective insolvency resolution, with minimal judicial interference.

The CLRP aims to act as a significant structural reform proposed by the Amendment Bill, 2025 by way of inserting Chapter IV-A (Sections 58A to Section 58K), providing a structural framework for CLRP. This proposed process is distinct from the CIRP and proposes a structure wherein FCs are allowed to initiate the process without approaching the court, for certain classes of CD. One of the distinctive features is the debtor-in-possession model, allowing the management of the affairs of CD during the CLRP to remain with the board of CD. The CLRP also provides for more limited involvement of the Adjudicating Authority (AA) in comparison to the pre-existing CIRP mechanism. The proposed amendment thus aims to achieve a faster and more cost-effective resolution, under the NCLT’s limited supervision.

Overview of the Proposed CLRP Framework

The CLRP framework is based on the Expert Committee Report on Creditor Led Resolution Approach in Fast-track Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code 2016 (Expert Committee Report 2023). The mandate of the Expert Committee Report 2023 was to reimagine the FCIRP, and thus the Expert Committee Report 2023 proposed a mechanism for quicker and efficient process of resolving insolvency by introducing a two-stage process. First, an out-of-court initiated discussions, wherein FCs of a CD may initiate the process, and later select and approve a resolution plan, and second, involving the AA only for the final approval of the resolution plan, or for obtaining a formal moratorium, if needed at any stage. The two-staged process has been given a timeline of 150 days, with an extension of 45 days, which can be granted only once, subject to approval from committee of creditors (CoC) and AA.

The Amendment Bill 2025 retains the two-staged process, adding procedural safeguards, such as requiring approval from notified FCs of CD representing not less than 51% in value of the debt due, providing the CD with formal notice of intention to initiate CLRP, allowing the CD to make their representation within 30 days, post which the FCs may appoint an insolvency professional as the RP, who is bound to a public announcement of the initiation of CLRP, and inform the same to AA and Insolvency and Bankruptcy Board of India. 

The CD is empowered to object to the same before the AA within 30 days of the public announcement, which is also the CLRP commencement date. If the AA is satisfied that either no default has occurred, or both a default has not occurred and the procedure is improper, AA may declare the commencement of the process to be void ab-initio. However, if the AA notes that a default has occurred, yet the procedure under contravention of Sections 58A or Section 58B was not followed, AA shall convert the CLRP to CIRP as per Section 58H.

The CLRP framework maintains a “debtor-in-possession” model, allowing for the management of affairs of the CD to continue to vest in the board of directors, partners or promoters of CD, who are required to co-operate with the RP, and failure of which would incur liability under Section 54G and Section 77A. The RP has been granted limited powers to intervene in the day-to-day affairs of the CD. This ensures that the CD can be kept as a going-concern, and the CD is allowed to manage the affairs while co-operating with the CoC for an efficient resolution.

Challenges within the CLRP Framework

The proposed insertion of Chapter IV-A circumvents the objectives of the Code and curbs the power of judicial review of AA. The creditor driven approach opens up doors for financial institutions to abuse the mechanism to compel smaller borrowers to comply. Further, the departure from filing an application before the AA for initiation for insolvency, while aimed to reduce the judicial delay, the out-of-court initiation is burdened with their own delays. The Expert Committee Report 2023 recommended that only scheduled commercial banks and other FC specified by Central Government be initially eligible to initiate CLRP, however, the Amendment Bill 2025 does not clarify the eligibility of such FCs, thereby widening the scope beyond the initial recommendation.

Delays Caused in the First Stage

The core intent of CLRP is to increase efficiency by reducing judicial intervention is compromised early on, and thereby rendering the out-of-court stage inefficient. The CD’s right to object at first instance, coupled with lack of an automatic moratorium, and delayed adjudication of claims, while well intentioned, introduces scope of delays due to the judicial interventions. 

The CD’s right to challenge the initiation of CLRP at the first instance immediately invokes judicial delay, as the CD is entitled to file an application to object to the process within 30 days of the CLRP commencement date, and if the AA finds contravention of the initiation procedures under Section 58A or Section 58B, even if default exists, it must convert the process to CIRP. The AA has been granted a period of 30 days from the date of receipt of the CD’s application to adjudicate upon the validity of CLRP initiation, thereby creating a similar bottleneck like situation which exists at the admission stages of CIRP. This delay further risks the devaluation of assets held by CD due to passage of time, and lack of streamlined resolution process. 

Furthermore, moratorium in CLRP is neither automatic, nor truly out-of-court as the moratorium requires an application by the RP only after obtaining 51% approval from CoC, filed before AA, which would be granted in cases deemed for proper and efficient conduct of the CLRP. However, while the moratorium begins upon filing of application under Section 58G, the final decision on whether to confirm or reject rests with the AA, introducing significant judicial delays owing to the voluminous pendency of cases before the AA. 

Finally, the issue of adjudication of claims of creditors submitted to the RP is also delayed. The CLRP model delays the right of creditors to raise objections regarding the RP’s acceptance or rejection of claims before the AA, until after an application for approval Resolution Plan is filed in the second stage. As it is trite law that the RP cannot adjudicate on claims,  there exists a potential risk that aggrieved creditors may approach writ courts on the grounds of non-availability of an efficacious remedy, thereby causing unintended judicial interference and delay. 

While the Hon’ble Supreme Court in Mohd. Enterprises (Tanzania) Limited v. Farooq Ali Khan, set aside order of the Hon’ble Karnataka High Court exercising its jurisdiction under Article 226 to reject the resolution plan approved by CoC and AA. The Hon’ble Supreme Court in the captioned matter opined that the “the Insolvency and Bankruptcy Code is a complete code in itself, having sufficient checks and balances, remedial avenues and appeals”, and ousted the supervisory jurisdiction by High Courts. However, the same cannot be said in the cases wherein a dissatisfied creditor is barred from approaching AA under the Code until the Resolution Plan is filed for approval before the AA, leaving writ as the sole remedy.

Structural Flaws of the Debtor-in-Possession Model

The framework's adoption of the debtor-in-possession model, reliant on the existing management's cooperation, contains inherent failure mechanisms that defeat the purpose of a fast-track process. While the “debtor-in-possession” model was prevalent in the old insolvency regime under Sick Industrial Companies (Special Provisions) Act 1985, the Code shifted to a creditor-in-control model, to allow for maximization of asset value in a time efficient manner, while ensuring the circulation of credit in the economy. A shift back to the old regime falls counter intuitive to the aims and objectives of the present-day Code.

In the CLRP mechanism, there exists a high risk of converting it to CIRP as such is mandatory if the resolution plan is not approved within the permissible period i.e., one hundred and fifty days plus the single forty-five day extension, or if the AA is satisfied that the CD failed to co-operate with the RP, or if the CoC resolves by 66% vote to convert the process under Section 58J, due to reasons such as non-cooperation or fraud. The Amendment Bill 2025 grants the AA power to decide the stage from which CIRP shall commence, after considering CoC’s recommendation, such a scenario leads to imminent delay and wastage of judicial time as the adjudication process occurred in CLRP will have to be taken up during CIRP once again.

Additionally, the unrealistically short timeline invites failure because the entire resolution process must be completed within 150 days, extensible by only 45 days, leading up to a total 195 days, a period dramatically shorter than the one prescribed for CIRP (one hundred and eighty days plus the single ninety day extension), and much lesser than the average time taken for CIRPs (four hundred and thirty four days), making the complex mandated steps, such as obtaining a fresh asset valuation similar to CIRP, highly susceptible to failure and resulting in conversion to a formal CIRP. 

Moreover, the Expert Committee Report 2023 proposed that the CD may be provided an opportunity to match the best resolution plan received from the market (Market Plan). As CLRP commences early default, the bar under Section 29A regarding on-performing asset declaration may not apply, thereby incentivizing the CD to co-operate in the resolution process. The best plan i.e., Market Plan or the CD’s resolution plan would be accepted by CoC, and later by the AA. However, the Amendment Bill 2025 stays silent on the recommendation of the Expert Committee Report 2023, the CD loses on the opportunity to retain control of the business post the acceptance of resolution plan, even after retaining control during the CLRP timeline. 

Conclusion

The Amendment Bill 2025 introducing CLRP as a transformative mechanism designed to expedite insolvency resolution, aspires to reduce delays through minimal judicial intervention, contains in and of itself, significant structural and procedural challenges which may undermine its purpose, as well as the objectives of the Code.

The proposed CLRP framework, while based on the Expert Committee Report 2023, departs fundamentally from the creditor-in-control model established by the Code. The mechanism reverts to the debtor-in-possession model similar to the antique Sick Industrial Companies Act 1985, the CLRP risks reintroducing the very inefficiencies which led to the enactment of the Code. The Expert Committee's recommendation regarding the CD’s opportunity to match the Market Plan has notably been omitted from the Amendment Bill 2025, thereby eliminating a critical incentive mechanism that could have ensured debtor co-operation throughout the process.

The framework’s contradictions become evident in its treatment of judicial intervention. While marketed as an out-of-court mechanism, the CLRP retains multiple points which require judicial involvement, introducing substantial delays. Further, the timeline prescribed for CLRP appears unrealistic when viewed in the light of average time required for CIRP’s conclusion, as well as the statutory CIRP timeline. ​

In conclusion, while the CLRP framework presents itself an progressive endeavor to introduce flexibility and efficiency into the insolvency regime, its current form contains several flaws that go to the root of the matter, compromising its efficacy. The retention of the debtor-in-possession model, compressed timelines, inadequate incentive structures, and multiple judicial intervention points collectively suggest that the CLRP may function more as a precursor to CIRP rather than as a viable standalone resolution mechanism. In order to achieve the objectives of time-bound resolution and asset value maximization, the Amendment Bill 2025 requires substantive reworks, in line with foreign jurisprudence. Without such refinements, the CLRP risks becoming yet another procedural layer that adds complexity rather than efficiency to India's insolvency resolution framework.