Distressed M&A Under the IBC and Its Timeline, Risks and Structuring

Vikrant D. Shetty

Sep 25

10 min read

Distressed M&A Playbook Under IBC: Timeline, Risks and Structuring

Acquiring a distressed business through the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 lets a buyer take assets at below-market value with a clean slate from pre-insolvency liabilities under Section 32A. The process compresses due diligence into roughly thirty to forty-five days and offers no representations or warranties from the committee of creditors, so every risk that diligence cannot resolve must be priced into the bid. A prospective resolution applicant must also clear the eligibility bar under Section 29A before its plan can even be considered. This post sets out the CIRP timeline, the eligibility screen, and the risks a buyer faces after approval.

What Is the CIRP Timeline and What Drives It?

The process runs from the insolvency commencement date. The resolution is meant to be completed within one hundred and eighty days, extendable by ninety days, and in any event within an outer limit of three hundred and thirty days including time spent in litigation. In practice, many processes exceed even this because of the workload of the Tribunal, litigation over eligibility and claims, and successive revisions of the plan. The key stages and their approximate windows are the appointment of the interim resolution professional in the first week; the public announcement and claim window over the first ninety days; the issue of the information memorandum from around day sixty; the deadline for expressions of interest and then for resolution plans over the following weeks; and the committee vote and Tribunal approval towards the end. A buyer should treat the published timetable as indicative and plan for slippage.

The Information Memorandum and Request for Resolution Plans

The resolution professional prepares an information memorandum covering the corporate debtor's financial position, its assets and liabilities, pending litigation, regulatory status, and operations, and provides it to the prospective resolution applicants who have filed a compliant expression of interest and satisfied the eligibility conditions. The request for resolution plans then sets out the terms on which bids are invited: the minimum upfront payment, the payment timeline, the treatment of employees, operational creditors, and government dues, and the performance security required. The applicant frames its plan against these terms, and a plan that fails to meet the minimum requirements will not be put to the committee.

Due Diligence Constraints

Due diligence in an insolvency is compressed and imperfect. A prospective applicant typically has only thirty to forty-five days after receiving the information memorandum to complete its diligence and submit a plan, and the resolution professional and the suspended management are the primary sources of information, with data-room access sometimes limited. Crucially, there are no representations or warranties from the committee of creditors, so every uncertainty that diligence uncovers, and every risk it cannot resolve, must be priced into the bid. Legal, financial, tax, and environmental due diligence remains essential, but it has to be planned to move at the speed the process demands.

What Does Section 29A Eligibility Screening Require?

Before a plan can be considered, the resolution professional screens the applicant for eligibility under Section 29A. The principal disqualifications include an account classified as a non-performing asset with the corporate debtor's lenders unless the dues are cleared before approval, status as a wilful defaulter, a conviction for an offence carrying two or more years of imprisonment, disqualification as a director under the Companies Act, 2013, and connection to a person who is himself ineligible. The bar was upheld by the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India [(2019) 4 SCC 17], which recognised its purpose of keeping defaulting promoters and their proxies out of the process. A prospective applicant should run its own Section 29A analysis before bidding, since an ineligible plan cannot even be placed before the committee.

The Clean Slate: Section 31, Section 32A, and the Ghanashyam Mishra Principle

One of the main attractions of acquiring through the Code is the clean slate that a successful resolution applicant receives. Section 31 makes an approved resolution plan binding on the corporate debtor, its creditors, employees, guarantors, and the government, and Section 32A shields the corporate debtor and its property from prosecution and attachment for offences committed before the process began. The Supreme Court confirmed the reach of this principle in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [(2021) 9 SCC 657], holding that on approval of a resolution plan every claim that is not part of the plan, including statutory and tax dues owed to central, State, and local authorities, stands extinguished, and that no proceedings for such dues for the pre-approval period can continue. This is the legal foundation of the value on offer in distressed deals: the buyer takes the business free of the tail of undisclosed and unadmitted liabilities that would sink an ordinary private acquisition. The protection does not, however, extend to the former promoters or directors who committed the offences.

Structuring the Resolution Plan

Lump-Sum Acquisition

The most common structure is a lump-sum acquisition. The resolution applicant pays a fixed sum, upfront or in structured tranches, to the committee of creditors, which distributes it among the creditors in accordance with the plan, and the applicant acquires the business free of past liabilities. This is the structure that most directly delivers the clean-slate benefit, and the certainty it offers creditors often makes it attractive at the voting stage.

Equity Infusion With Debt Restructuring

In an equity-infusion structure, the resolution applicant injects fresh equity and restructures the existing debt, and the creditors receive a combination of upfront cash, optionally convertible debentures, or equity in the restructured company. This structure is common for large infrastructure and operating businesses where preserving relationships, licences, and continued operations matters as much as the headline price.

Asset-Specific Plans

A resolution plan can also contemplate the sale of discrete assets rather than the corporate debtor as a going concern. This is less common under the resolution process than under liquidation, but it is permitted where the resolution professional and the committee are satisfied that it yields better value for creditors than a going-concern sale.

Committee Voting and Plan Approval

A resolution plan requires the approval of at least sixty-six per cent of the committee of creditors by value of financial debt. Once approved, it goes to the NCLT for sanction under Section 31, and the Tribunal checks that it complies with the requirements of Section 30(2): the payment of the costs of the process, the dues of operational creditors at the specified level, and the liquidation-value floor for dissenting creditors. As the Supreme Court held in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [(2020) 8 SCC 531], the Tribunal cannot modify the commercial terms of the plan or substitute its own business judgment for the commercial wisdom of the committee, and its role at sanction is confined to checking compliance with the Code.

Post-Approval Risks

Even after the NCLT approves a plan, some risks remain. An appeal lies to the NCLAT and, on a question of law, to the Supreme Court, although the grounds are limited to matters such as fraud and non-compliance with the Code. If the transaction creates a combination above the thresholds of the Competition Act, the approval of the Competition Commission of India is required under Section 31(4) before implementation begins. Stamp-duty obligations vary from State to State and can be material on the transfer of assets. Sector-specific approvals, such as those of the securities regulator for a listed entity or the central bank for banking assets, may cause further delay, so a buyer should build these contingencies into both its price and its implementation timetable.

How Is the Bid and Interim Finance Funded?

A resolution applicant must also plan how the acquisition and the company's immediate needs will be funded. The upfront payment to creditors, the performance security, and the working capital the business will require on day one all have to be arranged before the plan is implemented, and the cost of any interim finance raised during the process, which enjoys priority as an insolvency-resolution-process cost, may itself form part of what the plan must repay. A plan that is attractive on headline price but silent on how the revived business will be funded is unlikely to satisfy either the committee of creditors or the Tribunal, both of which look for a credible path to implementation as well as a good number.

Frequently Asked Questions

How long does the typical CIRP acquisition take from start to finish?

The resolution is meant to be completed within three hundred and thirty days from the insolvency commencement date, including litigation, but in practice many processes take longer, sometimes eighteen months or more, because of the workload of the Tribunal and litigation over eligibility and claims.

Can a resolution plan include deferred payment to creditors?

Yes. Plans commonly combine an upfront cash payment with deferred payments over three to five years, and the committee of creditors evaluates the net present value and the security offered when comparing competing plans.

What warranties does a buyer get in a CIRP acquisition?

None from the committee of creditors. The resolution professional provides an information memorandum but offers no representations or warranties, so all identified risks must be priced into the bid, and thorough due diligence is the buyer's only real protection.

Can a resolution plan be challenged after NCLT approval?

Yes. An appeal lies to the NCLAT and then the Supreme Court, on limited grounds such as fraud, non-compliance with the requirements of the Code, and violation of Section 30(2). Mere dissatisfaction with the commercial outcome is not a valid ground.

What is the performance security requirement?

The request for resolution plans usually requires each applicant to provide a bank guarantee or demand draft with its plan. If the applicant's plan is approved and it then fails to implement it, the performance security is liable to be forfeited.

Can foreign entities participate as resolution applicants?

Yes, subject to compliance with the Foreign Exchange Management Act and the applicable sectoral caps on foreign direct investment, and to any additional approvals required for regulated sectors such as banking and insurance.

Is Section 32A protection absolute?

No. Section 32A protects the corporate debtor's assets from attachment and the corporate debtor from prosecution for pre-insolvency offences, but it does not protect the former promoters or directors who committed those offences, and a resolution applicant connected to them cannot claim the protection.

What disqualifies a resolution applicant under Section 29A?

Section 29A of the Insolvency and Bankruptcy Code, 2016 disqualifies, among others, an applicant whose account is classified as a non-performing asset with the corporate debtor lenders unless the dues are cleared before the plan is approved, an applicant who is a wilful defaulter, one convicted of an offence carrying two years or more of imprisonment, one disqualified as a director under the Companies Act, 2013, and one connected to a person who is himself ineligible under the section. The bar was upheld by the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India.

What is the minimum threshold for committee approval of a resolution plan?

A resolution plan requires approval by at least sixty-six per cent of the committee of creditors by value of financial debt before it can be placed before the National Company Law Tribunal for sanction under Section 31 of the Insolvency and Bankruptcy Code, 2016. Votes are weighted by the value of each financial creditor claim rather than counted by number of creditors, so a small number of large lenders can decide the outcome even where more numerous smaller creditors vote the other way.

Can a resolution applicant modify its plan after submission?

A resolution applicant can revise its plan in response to the committee of creditors feedback or a competing bid during the process, and successive rounds of revision are common before a final vote, since the committee is entitled to negotiate for better terms. Once the committee approves a plan and it is submitted to the Tribunal for sanction, however, the scope for further modification narrows considerably, and the Tribunal role is limited to checking compliance rather than inviting further changes to commercial terms.

What happens if no resolution plan is approved within the CIRP timeline?

If no resolution plan is approved within the statutory timeline, including the outer limit of three hundred and thirty days set for the process, the corporate debtor ordinarily proceeds into liquidation under the Insolvency and Bankruptcy Code, 2016. This is a materially worse outcome for creditors than a going-concern resolution, which is one reason committees are often willing to negotiate seriously with a credible bidder as the deadline approaches rather than let the process lapse into liquidation.

Is Competition Commission approval required before implementing a resolution plan?

Where the acquisition under the resolution plan amounts to a combination above the notified asset or turnover thresholds under the Competition Act, 2002, approval of the Competition Commission of India is required under Section 31(4) of the Insolvency and Bankruptcy Code, 2016 before the plan can be implemented. A resolution applicant should assess this at the bidding stage, since the need for competition clearance can affect both the implementation timetable and the conditions attached to the plan.

What sources of due diligence are available to a bidder during CIRP?

A prospective resolution applicant relies primarily on the information memorandum prepared by the resolution professional, supplemented by data-room access where the resolution professional makes one available, and by questions put to the resolution professional and the suspended management. Independent verification is limited compared with a private acquisition, since there are no warranties from the committee of creditors, so a bidder typically supplements the official disclosure with its own legal, financial, tax, and environmental checks wherever access permits.

What is interim finance and does it rank ahead of other creditors?

Interim finance is funding raised during the corporate insolvency resolution process, typically to keep the corporate debtor operating as a going concern while a resolution plan is being worked out. The cost of interim finance is treated as part of the insolvency resolution process costs, which rank at the top of the payment waterfall under the Insolvency and Bankruptcy Code, 2016, ahead of most other claims, and a resolution plan must account for repaying it before other creditors are satisfied.