Due Diligence Checklist for Stressed Asset Acquisitions Under IBC

Vikrant D. Shetty

Sep 27

11 min read

Updated: Oct 21

Due Diligence Checklist for Stressed Asset Acquisitions Under IBC

A resolution applicant acquiring a stressed corporate debtor under the Insolvency and Bankruptcy Code, 2016 must first confirm its own eligibility under Section 29A, since a plan submitted by an ineligible applicant can be rejected or later unwound. Beyond eligibility, diligence must cover the claims admitted by the resolution professional, the target's material contracts, licences, litigation and workforce liabilities, and the clean-slate protection an approved resolution plan gives under Section 31. This article sets out the due diligence checklist a bidder should work through before submitting a resolution plan, from Section 29A screening through closing conditions.

Who Is Ineligible to Submit a Resolution Plan Under Section 29A?

Section 29A of the IBC sets out an exhaustive list of persons who are ineligible to submit a resolution plan. The categories of disqualification include: undischarged insolvents; wilful defaulters as classified under RBI guidelines; promoters or persons in management or control of the corporate debtor whose loan accounts have been classified as non-performing assets for one year or more (subject to payment of all overdue amounts with interest before submission of the plan); persons convicted of offences punishable with two or more years of imprisonment; persons subject to an order under Section 162 of the Companies Act, 2013 (disqualification of directors); persons who have executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency has been admitted; and related parties of any of the above.

The Resolution Professional (RP) is responsible for verifying eligibility. The IBBI has made clear that mere reliance on an affidavit from the prospective resolution applicant is insufficient; the RP must independently verify eligibility through background checks. Prospective bidders should expect rigorous scrutiny and prepare documentation accordingly.

Information Memorandum and Virtual Data Room

The RP prepares an Information Memorandum under Section 29 of the IBC, which contains the material information about the corporate debtor that bidders need to formulate a resolution plan. This document typically covers: the corporate debtor's business operations and financial statements; details of assets and liabilities; pending litigation and contingent liabilities; existing contracts with customers, suppliers, and employees; regulatory licences and approvals; and details of the CIRP itself.

A virtual data room (VDR) is typically made available to bidders who have executed non-disclosure agreements. Access to the VDR is time-limited, and the scope of information is often constrained by the RP's obligations to multiple bidders and by confidentiality concerns. Bidders should submit comprehensive information requests early and document all gaps in disclosure, as post-approval claims that the RP withheld material information are difficult to sustain.

Financial and Accounting Due Diligence

Admitted Claims and Waterfall Projections

A key diligence task is mapping the claims admitted by the RP against the classes of creditors under Section 53 of the IBC. The waterfall under Section 53 determines who gets paid and in what order. A resolution plan must address all admitted claims; a plan that does not provide for treatment of operational creditors at least on par with liquidation value has been struck down by courts.

Bidders must also examine whether claims remain disputed and the likely outcome if additional claims are admitted. Unresolved claim disputes can affect the distribution mechanics even after plan approval.

Tax Liabilities

The Supreme Court confirmed in Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657] that once a resolution plan is approved under Section 31, all claims not included in the plan stand extinguished. Tax dues for the pre-CIRP period that the income tax department or GST department failed to file as claims in the CIRP are extinguished. However, dues arising after the insolvency commencement date remain the ongoing obligation of the corporate debtor under new management.

Legal Due Diligence

Title Verification and Encumbrances

Acquisition of the corporate debtor through a resolution plan is an acquisition of the company as a going concern, not a direct asset purchase. The acquirer takes the corporate debtor along with its assets and liabilities as specified in the plan. Title to specific assets must be verified, including search reports for immovable properties, registration of charges with the Registrar of Companies, hypothecation and mortgage documents, and any subsisting attachment or freezing orders by regulatory or tax authorities.

Do Regulatory Licences Held by the Corporate Debtor Transfer to the Acquirer?

Many corporate debtors hold licences, permits, or registrations that are sector-specific and may not automatically transfer to new promoters. SEBI registrations, RBI licences, environmental clearances, and spectrum licences are common examples. Diligence must identify each critical licence, the authority that granted it, and whether a change of control triggers a fresh application, prior approval, or deemed transfer. The resolution plan should specifically address licence continuity and the timing of regulatory approvals.

Pending and Threatened Litigation

Post-approval, creditors who did not file claims in the CIRP or whose claims were not included in the resolution plan are ordinarily barred from pursuing the corporate debtor. But criminal proceedings are not extinguished by the resolution plan. Diligence should map all criminal investigations, prosecution complaints, SEBI adjudication orders, and pending inquiries by regulators. The resolution applicant should also assess exposure under environmental statutes, which may attract continuing personal liability on the company's officers.

Operational and HR Due Diligence

Workforce-related obligations deserve careful attention. Workmen's dues for the 24 months immediately preceding the liquidation commencement date rank pari passu with secured creditors under Section 53. In a going-concern sale through CIRP, the resolution plan must address treatment of employees. The Industrial Disputes Act, 1947 may require compliance before any retrenchment, and a plan that promises workforce continuity creates contractual obligations binding on the acquirer.

Key supplier and customer contracts should be reviewed for change-of-control clauses, rights of termination on insolvency, and assignment restrictions. Contracts that terminate automatically on change of management are value destroyers that must be identified before the plan is submitted.

What Should Bidders Negotiate Before Submitting a Resolution Plan?

Resolution plans must comply with Section 30(2) of the IBC, which sets the minimum content requirements. The plan must provide for the amount payable to operational creditors (not less than liquidation value), the mechanism for management of the corporate debtor after approval, and the means of implementation. Plans must also comply with applicable laws during the implementation period, as specified by the IBBI.

The CoC evaluates competing plans under Section 30(4) on the basis of feasibility and viability, and may require revisions. Bidders should treat the initial plan submission as the start of a negotiation, not the end of one. Legal advisors should be present at CoC meetings and be prepared to respond to queries about specific provisions within short timescales.

Section 29A and the ArcelorMittal Test

Any acquisition of a stressed asset through the insolvency process is governed by the eligibility bar of Section 29A, the reach of which the Supreme Court explained in ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta [(2019) 2 SCC 1]. The Court held that Section 29A disqualifies a range of persons from submitting a resolution plan, including those who are connected to the defaulting management or who hold non-performing accounts, and it interpreted the connections and control tests purposively so that ineligible persons could not regain the company through proxies. Crucially, the Court explained that an applicant hit by the non-performing-account disqualification must clear the overdue amounts to become eligible, and that eligibility is tested at the time the plan is submitted. This decision is the essential reference for anyone assessing who may acquire a stressed asset.

Section 29A Due Diligence for a Resolution Applicant

Because ineligibility under Section 29A can invalidate a plan and unwind a hard-won acquisition, a prospective resolution applicant must conduct careful due diligence on its own eligibility before bidding. This means examining its connections to the former management and promoters of the corporate debtor, identifying any non-performing accounts held by it or by persons acting jointly or in concert with it, and checking for the other disqualifications the section lists, such as conviction for certain offences or classification as a wilful defaulter. Where a disqualification exists but is curable, for example by paying the overdue amounts on a non-performing account, the applicant must complete the cure before submitting its plan. A rigorous eligibility review at the outset avoids the fatal discovery of ineligibility after the process is well advanced.

Diligence on the Target and the Clean Slate

Beyond its own eligibility, an acquirer must diligence the target's liabilities and understand the clean-slate principle that a successfully implemented resolution plan brings. On the approval of a plan, the claims dealt with by it are settled on the terms of the plan and pre-existing claims are extinguished, so that the acquirer takes the company free of the old baggage, which is precisely what makes stressed-asset acquisition through insolvency attractive. The acquirer must nonetheless verify the scope of what the plan covers, the treatment of contingent and statutory liabilities, and any claims that might survive, and it must ensure the plan is drafted to deliver the clean slate it expects. Combining eligibility diligence under Section 29A with careful diligence on the target's liabilities is what allows an acquirer to buy a stressed asset with confidence.

Frequently Asked Questions

Can a promoter of the corporate debtor submit a resolution plan?

Generally no, if the account has been classified as an NPA for one year or more. The promoter may become eligible by paying all overdue amounts with interest and charges relating to the NPA account before submission of the plan, subject to conditions under Section 29A(c).

Does a resolution plan extinguish all pre-CIRP liabilities?

Liabilities not included in the approved resolution plan and not filed as claims in the CIRP are extinguished as against the corporate debtor after plan approval. Criminal liability and ongoing regulatory obligations are not extinguished.

What is the timeline for submitting a resolution plan?

The RP sets the deadline for plan submissions as part of the Request for Resolution Plans (RFRP). The overall CIRP must be completed within 180 days, extendable by 90 days with CoC and NCLT approval, and capped at 330 days including litigation delays.

Can a resolution plan be withdrawn after CoC approval?

A resolution applicant cannot unilaterally withdraw a plan after the CoC has approved it. Post-CoC withdrawal exposes the applicant to forfeiture of the earnest money deposit and potential action under the RFRP terms.

What due diligence can be done on claims admitted by the RP?

Bidders should obtain the list of admitted claims, cross-check against financial statements, review the basis for admission or rejection of specific claims, and assess the residual risk of claims admitted after the resolution plan is submitted but before NCLT approval.

Are environmental liabilities extinguished by the resolution plan?

The position is unsettled. While the clean-slate principle under Section 31 extinguishes creditor claims not included in the plan, statutory environmental remediation obligations may constitute ongoing regulatory requirements that bind the corporate debtor irrespective of the resolution plan.

What is Section 32A of the IBC and what protection does it give an acquirer?

Section 32A of the Insolvency and Bankruptcy Code, 2016 protects the corporate debtor and its property from prosecution and action for offences committed before the corporate insolvency resolution process began, once a resolution plan is approved under Section 31 and results in a change of management or control to an eligible applicant not involved in the earlier offence. The immunity runs to the corporate debtor as an entity and its property, not to the individual promoters or officers who committed the offence, who can still be prosecuted, and the new management must cooperate with any ongoing investigation.

What due diligence should be done on avoidance transactions under Sections 43 to 51 of the IBC?

Sections 43 to 51 of the Insolvency and Bankruptcy Code, 2016 allow the resolution professional or liquidator to apply to the Adjudicating Authority to avoid preferential, undervalued, extortionate credit and fraudulent transactions entered into before the insolvency process began. A bidder should review the resolution professional's disclosures on any such applications filed or contemplated, because a successful avoidance application can claw back value from a transaction the corporate debtor was party to, which can affect the assets and cash flows the acquirer expects to receive under the resolution plan.

What is the minimum amount a resolution plan must pay a dissenting financial creditor?

Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 requires that a resolution plan pay a dissenting financial creditor, one who voted against the plan in the committee of creditors, an amount not less than what that creditor would receive under the Section 53 liquidation waterfall if the corporate debtor were liquidated instead. The same provision requires operational creditors to receive not less than their entitlement in a hypothetical liquidation. A plan that shortchanges either group against this floor is liable to be rejected or set aside.

Can secured creditors enforce their security interest outside an approved resolution plan?

No. Once a resolution plan is approved by the Adjudicating Authority under Section 31 of the Insolvency and Bankruptcy Code, 2016, it binds the corporate debtor, its creditors, members and guarantors, and all claims not provided for in the plan stand extinguished, including a secured creditor's ability to separately enforce its security outside the plan's terms. A bidder should therefore diligence whether every secured creditor's claim has been properly admitted and addressed in the plan, since an omitted claim can still generate disputes even though it is legally extinguished.

What voting threshold must the committee of creditors meet to approve a resolution plan?

Under Section 30(4) of the Insolvency and Bankruptcy Code, 2016, a resolution plan is approved once not less than sixty-six per cent of the voting share of the financial creditors in the committee of creditors votes in its favour, counting all creditors entitled to vote, including those who vote against or abstain. Once that threshold is met, the plan binds every creditor and stakeholder, including those who voted against it. A bidder should track the voting composition of the committee, since a fragmented creditor base can make reaching the threshold harder to predict.

Can employees of the corporate debtor be terminated after a resolution plan is approved?

An approved resolution plan can provide for restructuring of the workforce, including retrenchment, subject to the terms the plan itself sets out and to applicable labour law protections such as notice, retrenchment compensation and, where relevant, prior consultation requirements. Because workmen's dues for the twenty-four months before the insolvency commencement date rank alongside secured creditors under Section 53, a bidder should diligence outstanding wage and statutory dues before acquisition and confirm how the plan proposes to treat continuing and terminated employees.

What happens to bank guarantees issued by the corporate debtor before insolvency?

Bank guarantees and performance guarantees issued by the corporate debtor before the corporate insolvency resolution process began are contingent liabilities that a bidder must diligence separately from admitted claims, because a guarantee only crystallises into a claim if it is invoked. Whether an invoked guarantee is treated as an admitted claim depends on the timing of invocation relative to the insolvency commencement date and how the resolution professional has classified it, so a bidder should obtain a schedule of all outstanding guarantees and their invocation status before submitting a plan.

What happens if a successful resolution applicant fails to implement the approved plan?

A resolution applicant who fails to implement an approved plan risks the Adjudicating Authority directing liquidation of the corporate debtor on the application of the committee of creditors, and can also face forfeiture of any performance security furnished when submitting the plan. Courts and the Insolvency and Bankruptcy Board of India have taken a strict view of non-implementation, since it defeats the object of a time-bound resolution process, so a bidder should be realistic about funding and regulatory approvals before committing to a plan's timeline.