Two-Stage Approval Process under the IBC: Expedition or Complication?
Introduction
The 2025 Amendment Bill to the Insolvency and Bankruptcy Code, 2016 (“IBC”) adds a proviso to Section 31 (1) that allows for a two-stage approval process for resolution plans by the National Company Law Tribunal (“NCLT”). On approval from the Committee of Creditors (“CoC”), it permits the NCLT to approve the implementation of the resolution plan first, and then the manner of distribution of funds within 30 days of the former approval. The Successful Resolution Applicant (“SRA”) may take charge of the company post the first stage of approval. The amendment seeks to prevent erosion of value of the Corporate Debtor (“CD”) pending approval of the resolution plan on account of inter-creditor disputes as to the manner of distribution of funds.
One may question the necessity of the amendment, given that the existing provision for a moratorium under Section 14 of the IBC acts as a guardrail against actions that may erode the value of the company during CIRP. However, the longer the Corporate Insolvency Resolution Process (“CIRP”) lasts, the more the value of the company deteriorates (see Pg.14 here). The suspension of the Board of Directors during the process means that significant decisions needed to keep the value of the company intact may not be made. This proposed amendment would provide control of the company to the SRA sooner, to make decisions that will help revive the company, thereby reducing the value lost due to delay in the CIRP.
In this article, I base my arguments on the detailed division of the content requirements for resolution plans at both stages of approval from a 2023 discussion paper of the IBBI. This discussion paper invited comments to the amendments proposed by the IBBI , among others, to Regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Process) Regulations, 2016, which details the mandatory contents of a resolution plan. The discussion paper is useful since it indicates the likely amendments to the said regulations corresponding to the amendment to Section 31(1) of the IBC, given that they have not yet been made.
The discussion paper provides that the first stage of approval would involve all aspects except the manner of distribution, including the feasibility and viability of the plan, the insolvency resolution costs amount, and total proceeds to be infused into the CD by the resolution applicant. This means that the total amount to be infused remains fixed at the first stage, and only the manner of distribution of this fixed amount is approved at the second stage. I argue that the proposed amendment is incomplete and incongruous with the rationale that it seeks to achieve. To do so, I point out the gaps in the proposed approval framework that lead to ambiguity. Then, I also refer to other parts of the code that are affected by the proposed amendment, but are not necessarily accounted for in the two-stage approval framework.
What The Amendment Overlooks
There are several problems that arise from the proposed amendment. First, past discussion papers (see here and here) of the IBBI posit that a two-stage approval process would aid in cases of “inter-creditor disputes” and “severe litigation” regarding the distribution of funds by the SRA. However, the 30-day timeline is unlikely to serve this purpose, as most cases in a court or tribunal regarding such disputes would take longer than that to arrive at a decision. The rationale behind arriving at this number also seems unclear. The Ministry of Corporate Affairs’ (“MCA”) submissions to the Select Committee on the 2025 Amendment imply that the 30-day timeline is only directory. This indicates that the timeline may be breached, perhaps more often than ideal. Hence, the proposed amendment may help in a limited number of cases where the inter-creditor dispute is close to resolution when the first approval was sought, or in cases where inter-creditor disputes were being negotiated without adversarial litigation, but not otherwise. While directory timelines are helpful, such timelines need to accommodate the realities of litigation. A provision based on a timeline, which is acknowledged to be directory in nature, may not account for difficulties that arise in case of extensions provided more often than not. For instance, in cases where extensions significantly beyond the 30-day timeline were provided end with non-approval at the second stage, there is greater scope for third-party rights accrued in the interim to be affected in the meantime when the SRA is in control post the first stage of approval.
Second, the proposed amendment also does not cover situations where the CoC or the NCLT does not approve the manner of distribution. The MCA in the Select Committee Report clarified that the matter would still be under the control of the NCLT in case of non-approval at the second stage, which can then issue appropriate interim directions. However, this does not normatively provide what is to happen in a case of non-approval, and provides full discretion to the NCLT to decide on the facts of each case without guiding factors. Further, the SRA may engage (for instance, sign contracts) with third parties for the purposes of running the company, once control is taken over after the first stage of approval. In such a case, non-approval at the second stage has the potential to lead to a flurry of litigation, in case the control is shifted back to the resolution professional and CoC.
Third, if approval is obtained at the first stage, the SRA may subsequently get away with unfair distribution of resources before the second stage approval. The NCLT or NCLAT is unlikely to interfere due to deference to the wisdom of the CoC. This leaves the parties involved in a precarious position, given that the SRA would have already taken charge of the CD. Creditors are unclear about the legal consequences of non-approval at the second stage, and it would also take more time to negotiate a favourable distribution, which the 30-day timeline does not account for. This makes going back on the first approval stage antithetical to the purpose of the amendment itself – pushing creditors to accept a distribution less favourable than what they perhaps deserved.
An instance where this could be the case is where the dispute to be adjudicated between the first and second stages of approval by the NCLT relates to the status of a creditor as operational or financial. If declared the latter, the amount that each financial creditor gets reduces, because the total amount infused by the SRA is specified and approved at the first stage. However, it is acknowledged that such situations may be limited, given that the proposed amendment requires 66% of the Committee of Creditors to approve even going ahead with the two-stage approval process. The 2023 discussion paper also proposes to keep the disputed amount in escrow accounts. If the regulations include such safeguards, the possibility of unfair distribution at the second stage may further be reduced.
The facts of the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors may be used to understand how a case under this two-stage approval process might proceed. There were two main inter-creditor disputes: first, the amount payable to one of the secured financial creditors, and second, the payments for the Operational Creditors (“OCs”) as opposed to the Financial Creditors (“FCs”). The NCLT disapproved of the manner of distribution between the FCs and the OCs, which was then appealed. Finally, the Supreme Court held that only creditors of the same class must be treated equally, the scope of judicial review of the NCLT is limited to Section 30(2) of the IBC, and ordered that the originally approved resolution plan must be implemented. But the problem took about 7 months from the NCLT’s decision to finally be settled by the Supreme Court.
If this same scenario were to arise, and the proposed amendment is to be used, the implementation plan would have to be approved first. The SRA would have taken control of the CD. The dispute between the parties would not have been resolved within 30 days by negotiation between themselves, and yet a majority of the CoC would have voted in favour of the manner of distribution. The NCLT also, as in the actual facts of the case, would not have approved the distribution, and the manner of distribution also would have taken 7 months to be finally settled by the Supreme Court. Thus, the first stage approval would have been granted, the SRA would have taken control of the company, and only 7 months after, the second stage approval would have come through after the law was settled by the Supreme Court regarding distribution between classes of creditors. This is to show through an illustration that the 30-day timeline would not be feasible if applied to the facts of a real-life case involving inter-creditor disputes. Of course, this exercise is only to use the facts and the timeline of the case, notwithstanding the fact that such a case would not arise today (because of the law being settled by this very case).
To further complicate the example, whether the SRA retains control of the CD during these 7 months (beyond the 30-day timeline specified in the proviso), or whether the control lapses back to the Resolution Professional, seems to be under the control of the NCLT or the appellate authorities. What happens if a separate interim application or case starts in this regard before the CoC approval, and is not decided within the 30 days, too, is unclear. And what happens in a case where the NCLT or appellate authorities finally do not approve of the manner of distribution proposed by the SRA, after control of the CD has been taken over by them too, is uncertain. This demonstrates that the amendment may not really achieve what the drafters seek to achieve with it, since the speed of the resolution process depends on the resolution of disputes, and transferring control prematurely may lead to uncertainty.
Most importantly, the proviso does not specify that the two-stage approval process must only be used in cases where there are such inter-creditor disputes. This unrestricted option provides potential for misuse due to the abovementioned problems, even when there are no disputes that warrant the two-stage approval.
Ripple Effects on Other Sections of the IBC
One question that flows from Section 30(2) of the IBC is, who is to be considered a dissenting FC? Dissenting FCs under the last paragraph of Section 30(2) of the IBC need to be paid a minimum of the value that they may have received in the instance of liquidation. This minimum amount is important to ensure, as mentioned, that an FC who dissents is not left with nothing in the final resolution plan merely because of their dissent. The 2025 proposed amendment also seeks to amend Section 30(2) with regard to dissenting financial creditors, making a discussion on dissenting FCs relevant. The fact that the amendment to Section 31(1) does not deal with this aspect could lead to litigation as to the status of dissenting financial creditors at both stages.
I contend that dissenting FCs at both stages of approval need to be considered as dissenting financial creditors for the purpose of Section 30(2). An FC may dissent because of a variety of reasons: from the non-viability of a plan to insufficiency of payment for that FC. A creditor may not be amenable to the implementation of the plan, but may approve of the manner of distribution of funds. The purpose (Para 52) of this provision is to make sure that the dissenting FCs are not left with nothing and crammed down by the majority FCs. I acknowledge, though, that such a situation, where the dissenting FCs are different at each stage, would be rare, given that there is already a requirement of 66% of the creditors to vote in favour of the two-stage approval process. But in the rare case that it is, dissenting FCs at both stages need to be protected under Section 30(2).
The notes on clauses in the bill also clarify that the moratorium period under Section 14 of the IBC lasts until the second stage of the approval process concludes. This means that even after the SRA has taken charge of the CD, it has the protection of the moratorium. While the need to extend the moratorium is understandable, it creates injustice for third parties who may want to initiate proceedings against actions of the company under SRA’s control. Although on paper the period is meant to be 30 days, the moratorium will most likely last longer, thus prolonging the injustice.
Conclusion
There is indeed deterioration of value due to delays in the insolvency resolution process, but the solution is not a two-stage approval process. It is unlikely in the first place that Creditors would vote for a resolution plan in which they are unsure of the amount they would receive. Yet, this article explored the problems in the case the process is chosen. I have argued that the 30-day timeline is unlikely to be adhered to, and the procedure in case this happens is unclear. I have also touched upon the ripple effects of this amendment on Section 30(2), and the implication of an extended moratorium due to this two-stage approval process under Section 14 of the IBC. The Select Committee has endorsed the proposed amendment to Section 31(1), without suggesting any changes. However, it is hoped that this specific provision is omitted from the act that is passed, or at least clearer regulations are passed in this regard.
* Avanthika Venkatesh is a student of the Batch of 2028, B.A.,LL.B. (Hons.) at the National Law School of India University.