Distressed M&A under IBC: fast-track resolution and what resolution applicants miss

The Insolvency and Bankruptcy Code is the cleanest legal framework Indian distressed M&A has ever had. Section 7 (financial creditor) and Section 9 (operational creditor) triggers, a 180-day Corporate Insolvency Resolution Process (CIRP) extendable to 270 and a hard ceiling of 330 days, a regulated Resolution Professional running the process, and a Committee of Creditors voting on the resolution plan.

For resolution applicants — buyers acquiring distressed assets through CIRP — the economics are structurally attractive. Typical resolution plans pay 30-60% of admitted claims, with the rest written off by creditors. The acquired asset comes through with a clean slate on legacy liabilities (subject to specific carve-outs).

But the economics that look clean on paper are not always clean in execution. Resolution applicants routinely underestimate four cost categories that show up post-resolution: hidden claims, KMP retention, employee dues priority, and regulatory liabilities.

Worth understanding the IBC framework, the typical economics, and where the gaps appear.

The CIRP framework

Triggering event. Section 7 (filed by financial creditor on default of ₹1 crore or more) or Section 9 (filed by operational creditor on default of ₹1 crore). NCLT admits the application, declares moratorium, and appoints an Interim Resolution Professional (IRP).

Public announcement. IRP publishes invitation for claims. Creditors submit claims within 14 days (extendable). Claims are verified and admitted by the IRP.

Committee of Creditors formation. Financial creditors form the CoC, with voting share proportional to claim amount. CoC appoints the Resolution Professional (RP) — typically the IRP confirmed or a different RP elected.

Resolution plan invitation. RP invites resolution plans from qualified applicants. Section 29A scrutiny excludes related parties, willful defaulters, and certain other categories.

CoC approval. Resolution plans are evaluated and voted on. 66% of CoC voting share required for plan approval.

NCLT approval. Approved plan submitted to NCLT for final sanction. Plan binding on all stakeholders once sanctioned.

Timeline. 180 days from CIRP commencement to plan approval, extendable by 90 days (270 days). Outer limit 330 days. Beyond which liquidation under Section 33.

The resolution applicant economics

What a resolution applicant typically pays:

Financial creditors. Secured financial creditors with first-charge security typically get 60-80% of admitted claims. Unsecured financial creditors 20-40%.

Operational creditors. Statutory minimum is the higher of 'liquidation value' allocated to them or what they would have received in liquidation. In practice, operational creditors often get 5-15% of admitted claims unless they have high liquidation priority.

Employees. Workmen and employee dues for 24 months pre-CIRP have second priority in Section 53 waterfall. Resolution plans typically protect these claims at 50-80%.

Statutory dues (GST, TDS, EPF). Government dues for 24 months pre-CIRP have third priority. Typical recovery 30-60% in resolution plans.

Trade creditors (other operational). Lower priority. Recovery 0-20% in many resolution plans.

Aggregate, a resolution plan that pays 30-50% of total admitted claims is considered competitive. Plans that pay below 25% face NCLT scrutiny on adequacy.

The applicant's economics: acquire the going-concern business at a discount to liquidation value, take over operations, and rebuild. The discount is real and the asset comes through with a clean slate on legacy unsecured creditors (subject to the waterfall priority for statutory dues and secured creditors).

Section 29A scrutiny

Resolution applicants must pass Section 29A eligibility. The provision excludes:

Related parties of the corporate debtor (defined broadly).

Willful defaulters under RBI definition.

Persons under criminal investigation for offences punishable with imprisonment of 2+ years.

Persons whose accounts have been classified as Non-Performing Assets for over a year.

Connected persons of the above categories.

The 29A scrutiny is rigorous. Resolution applicants and their related parties need to be cleanly outside all categories. Single 29A failure invalidates the bid.

Practical handling: 29A-eligibility certificate prepared by counsel before submitting resolution plan. Cross-checks on connected persons via family, business association, and shareholding linkages. Some applicants miss connected-party issues (an indirect ownership link, a related person on a defaulting entity's board) — these surface in CoC scrutiny or NCLT scrutiny and kill the bid.

Fast-track resolution under Section 55

For smaller corporate debtors, Section 55 provides a fast-track route — 90 days for resolution, extendable to 135.

Eligibility: corporate debtors with total assets below ₹1 crore (or other notified threshold), or specific categories prescribed by IBBI.

The fast-track applies in narrow situations and isn't a route for most mid-market distressed acquisitions. Worth knowing it exists; rare in practice.

Where resolution applicants underestimate cost

Four cost categories that routinely surprise resolution applicants post-resolution.

Hidden claims. Creditors who didn't submit claims during the public announcement window because they didn't know about the CIRP, or who submitted claims that were not admitted for procedural reasons. These claims can resurface post-resolution. Most are barred under the IBC's discharge provisions, but specific categories (post-CIRP creditors, certain statutory dues, contingent liabilities crystallising post-resolution) can come through.

Practical handling: extensive pre-bid diligence on potential claim universe. Ledger reviews. Pre-CIRP litigation review. GST and tax assessment review. Buyer's counsel typically estimates the contingent claim exposure and prices a provision into the bid.

KMP retention costs. The acquired business needs its senior team to operate. The CEO, CFO, COO, and key operating heads at the corporate debtor are often demoralised, looking for exits, or being courted by competitors. Retention packages for the top 10-15 leaders, post-resolution, run ₹5-20 crore depending on size.

Most resolution plans don't explicitly budget KMP retention — the costs are absorbed in the post-resolution operating budget. Applicants who don't plan for this lose key people in the first 60 days post-resolution and face execution risk on the turnaround.

Employee dues priority — Section 53 waterfall. The waterfall under Section 53 of IBC prioritises insolvency resolution process costs (Section 5(13)) first, secured creditors who relinquished security and workmen dues for 24 months second, employee dues for 12 months and unsecured financial creditors third, government dues fourth, secured creditors who didn't relinquish security fifth.

Resolution applicants paying through resolution plan need to respect the waterfall in priority. Workmen for 24 months and employees for 12 months pre-CIRP have a high priority. Some applicants underprovide for these in their plans and face CoC pushback or NCLT modification.

Regulatory liabilities. Tax notices, GST disputes, EPF/ESI dues, environmental compliance, sectoral regulatory penalties. Some of these continue post-resolution because they're statutory and not extinguishable through CIRP discharge.

GST liabilities pre-CIRP that crystallise post-resolution are particularly common. The GST department often issues assessment orders after the CIRP commenced, for periods before CIRP. These can run ₹2-10 crore on a mid-sized resolution target.

Practical handling: regulatory diligence pre-bid. Review of pending notices, scrutiny orders, environmental compliance status, sectoral approvals. Provision in the resolution plan for known regulatory exposure plus a contingency for unknowns.

What the resolution plan should include

Beyond pricing, a competitive resolution plan addresses:

Going-concern continuity. How the business will operate during and after the resolution. KMP retention, customer relationship transition, supplier confidence-building, working capital arrangement post-resolution.

Capital infusion. Resolution plan typically includes new capital infusion alongside legacy debt write-down. CoC values fresh capital because it improves business viability and reduces re-default risk. Typical infusion: 10-30% of resolution plan value.

Operational turnaround plan. What the applicant will do operationally to make the business viable. Cost rationalisation, product/segment focus, working capital re-engineering, capex investment.

Performance guarantees. Some CoCs require bank guarantees backing the resolution applicant's commitments. Pre-deposit security is becoming more common in larger CIRPs.

Stakeholder treatment. Specific handling of each creditor class, employees, statutory dues, KMP, customers, suppliers. CoC evaluates the plan on whether stakeholders are treated equitably.

The CoC dynamic

Worth understanding the Committee of Creditors. Financial creditors with admitted claims form the CoC. Voting share is proportional to claim amount. Decisions need 66% vote.

What CoC values:

(a) Recovery percentage to financial creditors (especially senior secured).

(b) Plan feasibility — operational realism and capital adequacy.

(c) Stakeholder treatment — equitable handling of employees and operational creditors.

(d) Track record of the resolution applicant — operational capability, financial strength.

Negotiating with CoC: most CoCs go through 2-3 rounds of plan iteration with applicants. Initial plan submitted, CoC raises concerns, applicant revises. The successful resolution applicant is usually not the highest bidder on day one but the most responsive to CoC concerns through the iteration.

Where deals break in CIRP

Three common failure modes:

29A disqualification. Applicant or connected person fails Section 29A. Bid invalidated. Sometimes discovered late in the process.

CoC rejection. Plan voted down for not meeting recovery thresholds or stakeholder treatment expectations. Plan revised or withdrawn.

NCLT scrutiny. Even after CoC approval, NCLT reviews for adequacy and stakeholder treatment. Operational creditors challenging unequal treatment can delay or reverse plan sanction.

Liquidation default. If no plan is approved within 330 days, mandatory liquidation. Some assets end up in liquidation when applicants withdraw or CoC fails to converge.

Resolution rate in Indian CIRPs: approximately 25-35% result in successful resolution; balance go to liquidation, withdrawal, or settlement.

What we run for resolution applicants

Three-phase engagement:

Phase 1 (pre-bid): Diligence on the corporate debtor — financial, legal, regulatory, operational. 29A eligibility scrutiny. Bid economics modelling. Plan drafting.

Phase 2 (CoC engagement): Plan submission, CoC presentations, iteration with CoC concerns, vote campaign. Successful plans usually emerge from 2-3 iterations.

Phase 3 (post-approval execution): Plan execution, NCLT compliance, monitoring agency setup, KMP retention, operational turnaround support.

Timeline: 4-8 months from engagement to NCLT sanction, depending on CIRP stage when engagement begins.

Distressed M&A under IBC is the cleanest framework for buying distressed assets that India has. The economics work for resolution applicants who do their homework. The economics fail for applicants who treat the resolution plan as the deal and ignore the hidden cost categories that surface in the 12 months after sanction.

What good looks like at NCLT sanction

Approved resolution plan with competitive recovery to CoC (typically 30-50%), explicit KMP retention budget, pre-priced regulatory contingency, 29A clearance documented, operational turnaround plan with budget. Capital infusion commitment backed by bank guarantee or pre-deposit.

Post-sanction, the resolution applicant has 30 days to deposit the plan amount and assume operations. KMP retention rolled out in the first 7 days. Stakeholder communication in the first 14 days. Operational turnaround starts on Day 1 of implementation.

Distressed M&A done well under IBC is a real value-creation route. Done poorly, it's a 18-month timesink that ends in NCLT challenges and operational decline.