Financial Viability and Feasibility of Resolution Plans under IBC
Insolvency and Bankruptcy Code (IBC) aims to revive distressed companies. A crucial aspect of this process is the formulation and approval of a Resolution Plan. This plan must not only address the claims of creditors but also demonstrate the financial viability and feasibility of the corporate debtor's future operations. This module delves into these critical aspects.
Understanding Financial Viability
Financial viability refers to the ability of the corporate debtor, under the proposed resolution plan, to generate sufficient cash flows to meet its obligations and continue as a going concern. It's about the long-term financial health and sustainability of the business post-resolution.
Understanding Financial Feasibility
Financial feasibility, on the other hand, focuses on the practicality and achievability of the plan's financial aspects. It's about whether the proposed funding, restructuring, and operational changes can actually be implemented and sustained.
| Aspect | Financial Viability | Financial Feasibility |
|---|---|---|
| Focus | Long-term profitability and sustainability | Practicality and achievability of financial arrangements |
| Question Answered | Can the business survive and thrive financially? | Can the plan's financial requirements be met? |
| Key Elements | Revenue generation, cost management, cash flow projections | Funding sources, capital availability, debt restructuring, liquidity management |
| Time Horizon | Future-oriented (going concern) | Implementation-focused (short to medium term) |
Role of the Committee of Creditors (CoC)
The Committee of Creditors (CoC) plays a pivotal role in evaluating the financial viability and feasibility of resolution plans. They are tasked with approving plans that offer the best outcome for all stakeholders.
The CoC must ensure that the resolution plan is not just a paper exercise but a practical roadmap for the company's revival, backed by sound financial projections and achievable funding.
Key Considerations for Evaluation
When assessing a resolution plan, the CoC and the Adjudicating Authority (National Company Law Tribunal - NCLT) consider several factors:
- Realistic Projections: Are the projected revenues, costs, and cash flows based on sound assumptions and market realities?
- Funding Sources: Are the proposed sources of funds for the plan (e.g., equity infusion, debt financing) credible and available?
- Debt Servicing Capacity: Can the company service its restructured debt obligations?
- Liquidity Management: Does the plan ensure adequate working capital for ongoing operations?
- Operational Changes: Are the proposed operational improvements and business strategies likely to lead to sustained profitability?
Financial viability focuses on the long-term ability of the company to generate profits and meet obligations, while financial feasibility focuses on the practical achievability of the plan's financial arrangements and funding.
The Role of Experts and Valuations
Often, the CoC relies on independent valuers and financial experts to assess the viability and feasibility of competing resolution plans. These experts provide crucial insights into the intrinsic value of the corporate debtor and the sustainability of proposed business models.
Consequences of Non-Viability/Feasibility
If a resolution plan is found to be neither financially viable nor feasible, it is unlikely to be approved by the CoC or the NCLT. In such scenarios, the IBC process may lead to liquidation of the corporate debtor.
A robust resolution plan is the cornerstone of successful corporate turnaround under the IBC. It requires a delicate balance of financial prudence and strategic foresight.
Learning Resources
The official legal text of the Insolvency and Bankruptcy Code, 2016, providing the foundational framework for resolution plans.
Access to various regulations framed by IBBI, including those related to the submission and evaluation of resolution plans.
Key judicial pronouncements and orders from the NCLT that interpret and apply the provisions related to resolution plans, viability, and feasibility.
A comprehensive overview of the IBC, explaining its objectives and key processes, including the evaluation of resolution plans.
A practical guide detailing the steps involved in formulating and approving resolution plans, with emphasis on financial aspects.
An analysis of how Indian courts have interpreted and applied the concepts of viability and feasibility in resolution plan approvals.
A detailed academic analysis of the IBC, covering its various facets including the critical evaluation of resolution plans.
Explains the importance of financial due diligence in assessing the health and prospects of a company undergoing insolvency, relevant to plan evaluation.
Discusses the significant powers and responsibilities of the Committee of Creditors in scrutinizing and approving resolution plans.
A general overview of the IBC, providing context and background information on its objectives and mechanisms.