The role of Corporate Insolvency Law is to ensure swift recovery of distressed companies and safeguard the rights of creditors. For economies worldwide, striking this delicate balance is paramount for fostering business continuity, maintaining economic stability, and encouraging investor confidence. IBC 2016 represents a significant paradigm shift in this global discourse, moving from a debtor-in-possession (DiP) model to a creditor-in-control (CiC) framework. But what are the fundamental differences between these two approaches, and how effectively does the IBC’s CiC model truly balance the competing objectives of business recovery and creditor protection, particularly when compared to prominent DiP jurisdictions like the United States? This article will delve into practical implications and jurisdictional nuances of both models, ultimately exploring whether a hybrid approach offers the most robust solution for modern insolvency regimes.
Creditor-in-Control vs. Debtor-in-Possession
The CiC model, as adopted by India’s IBC, empowers creditors to take the reins of a financially troubled company upon default. This means the existing management is largely sidelined, and control is transferred to an Interim Resolution Professional (IRP) or Resolution Professional (RP) who operates under the oversight of a Committee of Creditors (CoC). This CoC, primarily comprising financial creditors, is tasked with making crucial decisions, from approving resolution plans to determining whether a company should be restructured or liquidated. The landmark case of Essar Steel v. Satish Gupta1 affirmed the paramountcy of the CoC’s commercial wisdom in approving resolution plans, underscoring the IBC’s commitment to a creditor-driven process designed to minimise delays.
In stark contrast, the DiP model, exemplified by Chapter 112 bankruptcy in the United States, allows the existing management of a financially distressed company to retain control of its operations, assets, and business affairs, provided there’s no evidence of fraud, dishonesty, or egregious incompetence. The rationale behind this approach is rooted in the belief that the current management possesses invaluable institutional knowledge, industry expertise, and established relationships with employees, customers, and suppliers—all crucial elements for a successful turnaround.3 Under Chapter 11, the debtor initially holds the exclusive right to propose a resolution plan, which then requires court approval. While creditors may later propose alternative strategies, the ultimate approval of any plan rests with a majority of creditors. The U.S. system, unlike its CiC counterparts, tends to be less punitive towards existing management for the company’s financial woes, instead supporting their efforts towards recovery.
Key Implications
- Creditor Rights: A Tug of War
In the CiC model, creditor rights are significantly enhanced. It aims to ensure prompt recovery, reduce the risk of value erosion, and bolster confidence in the insolvency system. However, this concentration of power, particularly in the hands of financial creditors, often comes at the expense of operational creditors and minority stakeholders, whose interests may be overlooked. Conversely, the DiP model inherently restricts creditor control, especially in the early stages of the process. While courts may oversee crucial decisions, creditors often play a supporting role initially, which can delay recovery and heighten the risk of asset mismanagement. The model’s proponents argue that it allows creditors to negotiate with a familiar management group, thereby preserving business continuity.
- Business Viability: Knowledge vs. Objectivity
The CiC model posits that decisions concerning business viability are made based on financial prudence and objective business acumen, rather than the emotional or personal interests of the promoters. Resolution professionals, guided by creditors, are tasked with impartially assessing a business’s potential for revival as a going concern, ensuring that only viable entities are restructured and non-viable ones are liquidated. The downside, however, is the potential for information asymmetry. The DiP model, on the other hand, strongly advocates for business continuity by retaining existing management, especially if promoters possess deep industry knowledge. This model is built on the premise that the debtor will act as a fiduciary and is best positioned to revive the company. If the debtor lacks credibility or abuses their power, business viability can further decline, making revival challenging.
- Economic Efficiency: Speed vs. Flexibility
The CiC model aims to foster economic efficiency by ensuring optimal resource allocation and significantly reducing delays in insolvency resolution. It seeks to eliminate the inefficiencies of previous debtor-led regimes in India, where promoters often prolonged the process. The IBC’s time-bound structure and creditor oversight facilitate better asset utilisation and quicker decision-making, thereby improving credit markets, boosting investor confidence, and contributing to a more stable and predictable economy. The DiP model can also enhance economic efficiency by minimising disruption and facilitating rapid operational decisions, potentially promoting long-term revitalisation and innovative restructuring. However, if troubled businesses exploit the process to delay payments or maintain control without a genuine turnaround plan, economic efficiency suffers. Judicial involvement, while intended to supervise, can sometimes inadvertently lead to inefficiencies by postponing the inevitable.
Creditor-in-Control
The theoretical foundation of the CiC model is rooted in agency theory. By shifting power to creditors or a resolution professional, it promotes ex-ante discipline, as borrowers are aware that default will lead to a loss of control, encouraging improved financial planning and risk management, and enhancing corporate governance.
In terms of practical effectiveness, the CiC model under the IBC has demonstrably improved credit availability and financial stability by reaffirming trust in the lending system, particularly for banks and secured creditors. The IBC was, in part, envisioned to alleviate the burden of non-performing assets (NPAs) in India. The model introduces professional restructuring and an objective evaluation of business viability by removing defaulting management. While this strategy may sometimes overlook crucial insider information necessary for turnarounds, especially in MSMEs, the emphasis on time-bound resolution and asset value maximisation under creditor supervision can lead to higher recoveries and quicker capital recycling, ultimately boosting economic activity. Notably, following its implementation, India’s Ease of Doing Business ranking significantly improved, partly attributed to the IBC’s impact.
Jurisdictional variations exist. The UK, for instance, operates a hybrid model under the Insolvency Act 1986, where insolvency is administered by an administrator in the interests of creditors, but with significant creditor influence through the approval of restructuring plans and appeals. India’s IBC, 2016, imposes a stricter CiC regime, where management is placed in abeyance upon default, and control is transferred to an IRP/RP and the CoC. The “commercial wisdom” of the CoC is generally immune to judicial review, as confirmed in Essar Steel v. Satish Kumar Gupta, though operational creditors often find themselves in a subordinate position. The EU’s Directive on Preventive Restructuring (2019/1023) encourages early restructuring under debtor-led control with creditor consent, representing a hybrid model with diverse implementation across member states.
Debtor-in-Possession: Continuity and Negotiation
DiP allows for the continuity of business operations, preserving relationships with employees, customers, and suppliers that might otherwise be lost in a creditor-led process. This model also encourages negotiable restructuring plans for debt and equity, with courts primarily serving as mediators to facilitate consensual agreements between debtors and creditors.
Prior to the IBC, India had its own DiP model under laws like SICA and the Companies Act, 1956. However, this regime often led to promoters retaining control, creditors being largely powerless, and significant value destruction due to prolonged delays. The inefficiencies of Debt Recovery Tribunals (DRTs) and the Board for Industrial and Financial Reconstruction (BIFR) ultimately necessitated India’s shift to a creditor-in-control regime with the IBC. The EU Directive 2019/1023 also encourages early restructuring through debtor-driven models with court and creditor supervision, seeking business continuity, job retention, and equity, indicating a balanced DiP model with regulation.
Conclusion
Both the CiC and DiP models possess inherent merits and demerits. The IBC’s impact on behavioural change among lenders and borrowers in India is undeniable. The fear of IBC proceedings has incentivised defaulting debtors to proactively address their financial distress, leading to numerous applications for CIRP being withdrawn even before admission.4 This signals a significant shift in debtor behaviour and improved creditor leverage. However, the argument that existing management is often in the best position to manage a company’s affairs, possessing unparalleled knowledge, remains compelling. The DiP approach contends that removing existing management, in certain circumstances, risks undermining any possibility of rehabilitation. Conversely, there’s the risk that a debtor, feeling they have “nothing to lose and everything to gain,” might attempt to use rehabilitation procedures simply to delay the inevitable, leading to further asset erosion. The possibility of reckless or even fraudulent actions by debtor management during this period, even if the firm could be restored, is a significant concern.
Incorporating staggered stakeholder participation, establishing clear and flexible resolution timeframes, and ensuring intervention by independent professionals can significantly increase the resilience and effectiveness of such a system. The UK’s Schemes of Arrangement under the Companies Act 2006 exemplify this hybrid approach, demonstrating how debtor control can be preserved within a framework that still prioritises creditor sanction and judicial oversight.5 Ultimately, a thoughtfully designed hybrid model can better facilitate optimal debt resolution by balancing stakeholder interests, ensuring fairness, efficiency, and inclusivity, preserving business viability without infringing upon legitimate creditor rights.
Citations
- Civil Appeal No. 8766-67 of 2019
- U.S. Bankruptcy Code, Sections 1101–1174 (Chapter 11)
- David A. Skeel, Debt’s Dominion: A History of Bankruptcy Law in America, Princeton University Press, 2001.
- IBBI, Quarterly Newsletter, Vol. 19 (Jan–Mar 2024), S. 12A withdrawals.
- Kristin van Zwieten, “Restructuring Law: Recommendations from the UK,” Oxford Law Faculty Blog (2021).
Expositor(s): Adv. Khushboo Saraf