What Happens If Settlement Fails During CIRP?

During the Corporate Insolvency Resolution Process (CIRP), settlements between the corporate debtor and creditors help expedite resolution. However, not all settlements succeed. The Insolvency and Bankruptcy Code (IBC), 2016 anticipates failure scenarios and provides mechanisms to ensure the insolvency process continues smoothly and creditors’ interests are safeguarded.

What Happens If Settlement Fails During CIRP?

1. Continuation of CIRP

If the settlement proposal fails to get the required 90% approval from the Committee of Creditors (CoC), the withdrawal application under Section 12A cannot be approved.

The insolvency resolution process continues under the supervision of the Resolution Professional (RP).

2. Rejection of Withdrawal Application

The NCLT will reject any withdrawal application if the settlement is not genuine or if it fails to meet the threshold of CoC approval.

The CIRP remains active, and the RP continues to manage the debtor’s affairs.

3. Further Negotiations May Be Attempted

The debtor and creditors may attempt fresh negotiations or revise settlement terms.

Until a resolution plan is approved or the process reaches liquidation, settlements can be tried repeatedly.

4. Insolvency Resolution or Liquidation

If no settlement or resolution plan is approved within the CIRP timeline (typically 330 days), the company may be forced into liquidation.

Liquidation leads to the sale of assets to repay creditors according to priority.

5. Impact on Corporate Debtor and Creditors

Failed settlements may prolong uncertainty and financial stress for the debtor.

Creditors may lose time and value if the insolvency process is delayed.

However, CIRP provisions ensure creditors’ rights are protected through transparent processes.

Legal and Procedural Safeguards

The RP must report failure of settlements and keep CoC informed.

The CoC may decide on alternative resolution plans or liquidation.

The NCLT supervises and ensures procedural fairness throughout.

Example

A construction company attempts a settlement during CIRP by proposing partial payments to creditors. However, only 75% of CoC members approve the settlement, short of the required 90%.

Outcome:

The RP files the withdrawal application, but the CoC rejects the settlement.

The NCLT refuses to allow withdrawal under Section 12A.

CIRP continues with RP managing the resolution process.

The company and creditors explore other resolution options or proceed toward liquidation if no plan is approved.