Finding Prudence in Abstention

Insolvency is an inevitable part of the collective human experience in all organized communities.

- R VENKATAVARADAN

In the event that a company is unable to fulfill its obligations and multiple creditors are owed money, there would be a race for diligence by these creditors to pursue their own interests and recover as much of the owed money as possible. The Insolvency & Bankruptcy Code, 2016, provides for a structured mechanism to distribute the proceeds from a company's insolvency and, thereby, seeks to prevent such a race.

Under the code, the insolvency resolution process of a company concludes with the approval of the resolution plan by the National Company Law Tribunal. If the resolution plan is not approved, the corporate debtor will proceed to liquidation and eventually be dissolved. As part of this process, prospective applicants are invited to submit what are called as 'resolution plans' for taking over the company in distress. This is intended to facilitate proposals from persons interested in commercially viable but insolvent businesses to rescue such entities, creating value for all stakeholders.

Such a resolution plan must conform to the criteria in the code and meet such other conditions specified by the Insolvency and Bankruptcy Board of India. Once the resolution plan is approved by a committee of creditors, it is presented to the adjudicating authority for approval.