By Rajesh Narain Gupta, Saroj Pandey
The fifth report of the Insolvency Law Committee (“Committee”), published on June 15, 2022, addresses several issues encountered during the implementation of the code and recommends changes to improve it. The recommendations in this report focus primarily on corporate insolvency resolution (“CIRP”) and its effect on the overall liquidation process.
Dependence on usefulness of information
The Information Utility (“UI”) provides case status and progress information to all stakeholders, including creditors and debtors. It also provides information on cases that have been transferred out of bankruptcy. To save time and effort for the National Company Law Tribunal (“NCLT”) in obtaining and reviewing a new set of information, it was suggested to rely on the records registered with of the UI. This is in line with the relaxation provided for the acceptance of requests under the CIRP which take practically longer than the stipulated 14 (fourteen) days. The ultimate goal is to expedite the process of establishing default by creditors such as financial institutions through undisputed information. This provision will extend to operational creditors in due course with the development of the IE infrastructure.
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The Insolvency and Bankruptcy Code 2016 (“IBC”) requires that no legal action be taken against the debtor company during the period of the moratorium. This is to ensure that the debtor company is not harassed by creditors, who could request a stay of execution of their claims by the contracting authority (“AA”).
There has been ambiguity regarding the avoidance of certain transactions and inappropriate transactions during insolvency proceedings. Clarifications were provided by the Committee around these aspects, mentioning that the procedure will continue according to the stipulated deadlines despite the fact that it does not fully apply to subsequent cancellation requests. The provision also requires providing contract details to proceed with the cancellation process and sharing the related costs and benefits.
Late submission of resolution plans
Unsolicited plans must be submitted to the Creditors’ Committee (“CoC”) or resolution professional within a stipulated time frame for greater likelihood of approval. Although there have been no regulations or standard guidelines for accepting late submissions and revisions to plans, there have been instances where such plans have been approved. To avoid discretion in this matter, as it is not considered a CoC business decision that precludes review by the National Company Law Appellate Tribunal (“NCLAT”), the Committee recommends an amendment to the IBC to define clearly the mechanism for reviewing late submissions. To further corroborate the process, the AA was also instructed to approve or reject the plans within 30 (thirty) days.
Preliminary and expedited insolvency process
These new features introduced by the committee’s report include a two-step resolution process in which creditors agree to take a haircut on their debt in exchange for being paid in a few months while the business continues to operate as usual. . This does not mean that the look-back period will be limited in favor of a speedy process. But as the time between the CIRP filing and the opening of insolvency proceedings will be reduced, the look-back period will automatically normalize to make the opening date possible. IBBI has been advised to issue guidelines for the conduct of the CoC to standardize the resolution process for increased efficiency.
Stakeholder Consultation Committee (‘SCC’)
The SCC is a mandatory body to be constituted by the liquidator within 60 (sixty) days from the start date under the Liquidation Process Regulations. The primary purpose of this committee is to help standardize insolvency laws across all states. The committee is found to assist the IBBI in carrying out its duties and to provide advice to the liquidator.
Contribution of secured creditors
Secured creditors are allowed to contribute to the resolution plan. However, if a resolution plan is accepted by the CoC, secured creditors are not required to pay any amount. If the CoC does not approve a resolution, the secured creditors will be required to contribute to it and reimburse the liquidators.
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The IBC has seen tremendous modifications and clarifications from the judiciary which has enabled its robust operation which is quite encouraging. The proposed recommendations are a step in the direction of progress and will certainly contribute to the continued success of the IBC process. Apart from those discussed above, there are certain other suggestions from the Committee regarding the voluntary liquidation process, subordinate legislation and the operationalization of the IBC fund to reduce uncertainty and broaden the scope of existing provisions. The Department of Finance is expected to review the latest recommendations for an improved process.
(Rajesh Narain Gupta, Managing Partner and Saroj Pandey, Partner, SNG & Partners, Barristers and Advocates. Opinions expressed are those of the authors.)