The Debtor-in-Charge Problem: Why Creditor Led Resolution Process' Cooperation Paradox Could Undermine IBC Amendment 2025

The IBC Amendment Bill 2025 introduces the Creditor-Led Resolution Process, marking India's first genuine experiment with debtor-in-possession insolvency. On paper, it looks elegant. Let existing management continue running operations while creditors supervise through a resolution professional. Reduce tribunal dependence through out-of-court initiation and enable early intervention before accounts turn non-performing. This way you preserve going concern value that typically evaporates when you throw out the management team.

The problem? The entire framework rests on an assumption that might not survive contact with reality. It assumes promoters will enthusiastically cooperate in managing turnaround efforts even when they know the result will almost certainly be sale of their company to a third party. This creates what we call the cooperation paradox, a fundamental incentive misalignment that could render CLRP unworkable in precisely the cases where it's most needed.

Think about it from a promoter's perspective for a moment. You've built this company over several years. You hit financial trouble and the creditors initiate CLRP. You're now expected to spend the next six months working your hardest to save the business, maintain relationships, keep operations running smoothly. And then- what is the result? Hand over the keys to someone else who swoops in with a resolution plan. You get nothing. Would you cooperate?

How Creditor Led Resolution Process is Supposed to Work

The mechanics look straightforward enough. Financial creditors holding 51% of debt in a notified class can initiate CLRP by appointing a resolution professional, all without approaching the NCLT. The corporate debtor gets 30 days to respond. After considering the response and obtaining fresh 51% approval, creditors appoint the RP who makes a public announcement. CLRP is deemed commenced from that date.

During the 150 days (extendable by 45 days), management continues operating the business. The Board or partners retain control over affairs, make business decisions, handle day-to-day operations. The resolution professional attends all board and committee meetings and can veto resolutions but doesn't throw everyone out and take over like in traditional CIRP.

The RP calls for claims, prepares information memoranda, invites resolution plans, and can file avoidance transaction applications. A moratorium can be sought from the NCLT if needed, though it's not automatic. At the end, resolution plans need 66% CoC approval, followed by NCLT approval. If no plan emerges or directors don't cooperate, the NCLT converts CLRP into regular CIRP.

So far it appears that the resolution plan requirements will be the same as traditional CIRP under Section 30.

The Incentive Problem

Here's where theory collides with reality. Consider a typical scenario - a manufacturing company with promoter-directors faces financial distress. Creditors initiate CLRP and the promoters are asked to continue managing operations, preserve customer relationships, maintain supplier networks, keep employees motivated, and turnaround the business. They do this for 150-195 days while being supervised by the resolution professional.

At the end of this period, a resolution plan gets approved. The plan almost invariably involves sale of the company to a third-party resolution applicant who'll infuse fresh capital. The existing promoters lose control entirely. They get nothing for their efforts during CLRP except the dubious satisfaction of having delivered a healthy company to someone else.

Now ask the obvious question. Why would any rational promoter cooperate in this process?

It gets worse when you factor in Section 29A. This provision disqualifies certain persons from being resolution applicants - willful defaulters, persons with NPAs for over a year, persons disqualified from managing companies, convicted persons, and several other categories. Here's the kicker: Section 29A applies not just to resolution applicants in CIRP and CLRP, but also to purchasers of assets in liquidation.

This means if you're a Section 29A disqualified promoter, you cannot bid for the company in CLRP resolution, cannot bid for it in traditional CIRP, and cannot even purchase the assets if the company goes into liquidation. There's literally no escape route. No matter which process unfolds, you lose the company.

For such a promoter, CLRP offers absolutely nothing. The promoter has zero rational incentive to preserve value, maintain operations, or cooperate with the resolution professional.

What Global Models Actually Look Like

The US Chapter 11 model that supposedly inspired CLRP works very differently. In Chapter 11, the debtor remains in possession and proposes a reorganization plan. Here's the crucial bit: this plan can allow existing shareholders to retain ownership if they successfully restructure the debt and satisfy creditors. The reorganization is genuine as it doesn't automatically mean selling to a third party.

Indian CLRP imports the debtor-in-possession mechanism without the corresponding ability to retain ownership through debt restructuring alone. It assumes every resolution must involve a resolution applicant taking control. Perhaps the thought process of compulsory sale comes from the experience under SICA wherein when the debtor was in possession, the companies were not getting revived. (See Shri Arun Jaitley’s speech on IBC as noted in Innoventive judgement of the Supreme Court).

When Does CLRP Actually Make Sense?

There are a few scenarios where the framework could work despite these challenges.

First, where promoters aren't disqualified under Section 29A (on account of MSME exemption or for the reason that 12 months have not lapsed since declaration as NPA) and can realistically arrange financing to bid for their own company. In such cases, CLRP gives them time to arrange funds while keeping the business operational. This is genuine turnaround with a real shot at ownership retention.

Second, where going concern value so dramatically exceeds liquidation value that even uncooperative management can't entirely destroy it. Think of a company with valuable IP, brands, or market position. Creditors might pursue CLRP knowing they'll recover more through going concern sale despite management difficulties. This requires the value gap to be substantial enough to absorb the cooperation costs.

These scenarios represent a pretty small subset of potential insolvency cases. The vast majority involve owner-managed businesses where promoters have their life savings tied up and face Section 29A disqualifications arising from the very default that triggered insolvency.

The Resolution Plan Puzzle

The requirement for a resolution plan highlights another conceptual tension. Resolution plans under Section 30 must provide for management of affairs post-approval, but the framework provides no clear mechanism for pure debt restructuring plans where existing ownership continues.

Every resolution plan contemplated by the law seems to assume change of ownership. The resolution applicant becomes the new owner, the plan details how they'll operate the business, and existing promoters exit. There's no template for a plan that simply says: creditors take haircuts, debt gets restructured over extended timelines, some debt converts to equity held by creditors, and promoters continue managing operations under a modified capital structure.

This might be the most telling gap. If CLRP is genuinely about reorganization rather than sale, why doesn't the law explicitly contemplate debt-restructuring-only plans by the promoters? The assumption appears to be that resolution always means sale, which fundamentally contradicts the spirit of debtor-in-possession frameworks globally.

What Happens in Practice

Let's predict how this will actually play out. Creditors initiate CLRP. Management responds with defensive posturing, possibly challenging the default or the procedural compliance. If CLRP proceeds despite challenges, management engages in subtle non-cooperation. They don't actively sabotage (that would trigger penalties), but they don't proactively preserve value either.

As a result, critical information isn't volunteered and business opportunities aren't pursued aggressively. Relationships with key customers and suppliers aren't actively nurtured. Management goes through the motions of cooperation while ensuring the business doesn't become more valuable under their stewardship. Why would they deliver a healthy company to someone else?

The resolution professional, lacking operational control, can veto specific bad decisions but can't force good decisions. The RP attends board meetings but can't run the business. Supervision is inherently reactive. By the time the RP identifies problems, value's already been lost.

After 150-195 days of this dynamic, CLRP converts to traditional CIRP anyway. The NCLT appoints the RP in full control, displacing management. The process essentially becomes regular CIRP with a 5-6 month delay during which value eroded under hostile management. Creditors recover less than if they'd simply initiated CIRP from the start.

This isn't speculation. We've seen similar dynamics in other contexts where parties are asked to cooperate against their interests.

The Missing Legislative Elements

Several features could make CLRP workable but are conspicuously absent.

First, explicit provision for debt-restructuring-only resolution plans. Allow promoters whoa re not willful defaulters to propose plans that restructure obligations without bringing in third party resolution applicants. This requires creditor approval through the usual 66% voting, but doesn't mandate ownership change.

Second, graduated Section 29A disqualifications. Perhaps a promoter who defaulted due to macroeconomic factors or industry-wide distress shouldn't face the same absolute bar as a willful defaulter who siphoned funds. Context-specific eligibility might preserve cooperation incentives in appropriate cases.

Third, some form of compensation or incentive for disqualified promoters who successfully cooperate. Management fees for effective turnaround? Mandatory purchase of equity by the resolution applicant or retention of small percentage of equity if value's demonstrably preserved? Priority treatment in unsecured creditor category? Something that creates upside for cooperation rather than guaranteed zero outcome regardless of effort.

Fourth, clearer conversion triggers. The law says CLRP converts if directors don't cooperate, but what constitutes non-cooperation? Management doing the bare minimum while avoiding active sabotage might not trigger conversion despite being unhelpful. Objective metrics or specific behavioural standards would help resolution professionals identify problems early.

Fifth, provisions specifically addressing the going concern value preservation mandate. If the whole point is maintaining operations during resolution, perhaps certain operational decisions should be explicitly protected from RP veto. Clear delineation between strategic decisions (subject to RP veto) and operational decisions (management discretion) could reduce friction.

None of these features appear in the proposed amendments. The framework assumes cooperation will happen without addressing why it would.

What This Means for Stakeholders

Financial creditors considering CLRP should assess cooperation likelihood before initiation. Is management disqualified under Section 29A? If yes, expect problems. Can promoters realistically bid for their company? If no, expect non-cooperation. Is the company professionally managed with separation between ownership and control? If yes, CLRP might work. For owner-managed businesses with disqualified promoters, traditional CIRP with immediate RP control is probably more effective despite its drawbacks.

Corporate debtors and promoters face difficult choices. Those not disqualified under Section 29A might genuinely benefit from CLRP if they can arrange financing for resolution plan bidding. Those who are disqualified face a different calculus. Cooperation provides no tangible benefit, but might preserve reputation, ensure employee welfare, and facilitate orderly transition. These soft factors might matter to some promoters, but expecting them to drive behaviour systematically seems optimistic.

Resolution professionals will need enhanced skills for supervision in potentially hostile environments. Document every instance of non-cooperation meticulously. Be prepared for early conversion applications. Set clear expectations about information sharing and decision-making from day one. Consider whether specific cases are appropriate for CLRP or whether immediate recommendation for conversion to CIRP might serve creditor interests better.

Lawyers and advisors should help clients understand realistic prospects under CLRP given Section 29A constraints. The debtor-in-possession label might create false hope among promoters who think this is their chance to retain control. Clear-eyed assessment of eligibility and cooperation incentives is essential before engaging with the process.

Looking Ahead

The parliamentary select committee reviewing the IBC Amendment Bill has a real opportunity here to address these fundamental design issues before enactment. Simple tweaks to Section 30 to explicitly permit debt-restructuring-only plans would go a long way toward creating genuine reorganization pathways. Clarifications on when Section 29A disqualifications might be context-specific could preserve cooperation incentives in appropriate cases.

Without such changes, CLRP risks becoming another one of those things that looks great on paper but fails spectacularly in practice. The cooperation paradox isn't a minor implementation detail - it goes to the heart of whether the mechanism can function at all in the cases where it would theoretically be most useful.

India's insolvency ecosystem has built its success on creating frameworks that align stakeholder incentives with desired outcomes. The time-bound CIRP works because it creates urgency for all parties. The creditor-in-control model works because it empowers those with economic interest to drive decisions. The liquidation waterfall works because it provides clear hierarchy and certainty.

CLRP must meet this same standard. Debtor-in-possession can work, but only if debtors have genuine possession of something worth possessing. If the outcome is predetermined loss of control regardless of performance, the possession is illusory and the cooperation it requires won't materialize.

The choice is clear. Either provide realistic pathways for existing ownership to survive through debt restructuring, creating genuine cooperation incentives. Or abandon the debtor-in-possession pretense and stick with creditor-in-control mechanisms that don't rely on hostile management's voluntary cooperation. The current halfway approach satisfies neither goal and might deliver outcomes worse than either alternative.

For CLRP to succeed, the law must answer a simple question: When a promoter successfully turns around operations during the process, can they keep their company through approved debt restructuring? If the answer is yes, CLRP becomes a genuine reorganization mechanism worth taking seriously. If the answer is no, CLRP becomes an elaborate mechanism for achieving what traditional CIRP already accomplishes, just less efficiently and with more opportunities for value destruction along the way.

This is the third article in our series analyzing the IBC Amendment Bill 2025. We will continue examining key provisions and their practical implications for the insolvency ecosystem.