In a bid to ensure personal guarantors (PGs) of defaulting firms don’t escape paying their liabilities, the Insolvency and Bankruptcy Board of India (IBBI) has proposed that the creditors would continue to have rights to proceed against them and invoke the guarantees even after a resolution plan is submitted by the bidder.
The board, which performs a regulatory role, has proposed that the corporate insolvency regulation process (CIRP) be amended to bring in this change, taking cue from a recent Supreme Court ruling that the approval of a resolution plan of a bankrupt firm doesn’t mean automatic immunity to the guarantors.
The move by IBBI would help strengthen the hands of the creditors further, as it removes the ambiguity over in the extant rules over how guarantees are enforced. It will also make the recovery process smoother in many cases.
As per the latest IBBI newsletter, creditors have recovered merely 2.16%, or Rs 103 crore, of their admitted claims from personal guarantors under the IBC, implying that their escape route has been quite wide.
In a discussion paper floated on Wednesday, the IBBI said that to ensure that there is clarity on the rights of the financial creditor to enforce recovery under guarantee agreements, it is proposed that “CIRP regulations be amended to clarify that the resolution plan submitted by the resolution applicant shall not extinguish the rights of the creditors to proceed against guarantors and “enforce realisation of guarantees governed through various guarantee agreements”.
At present, in the majority of cases, the guarantees appear to be extinguished due to a clause in the resolution plan. The express legal disqualification to such clauses has now been proposed in view of the legal challenges being faced in recoveries against PGs. “This would enhance recovery prospects of creditors as they are now legally immunised with the inherent right to enforce against the PGs, as generally, under the dawn of resolutions, they were forced to release guarantees,” said Anjali Jain, partner, Areness.
The Supreme Court, which in the matter of Lalit Kumar Jain vs. Union of India, had clarified that approval of a resolution plan of a corporate debtor (CD) does not automatically release its guarantors from their liability.
Prashanth Shivadass, partner, Shivadass & Shivadass said that the proposal intends to fully protect the interest of the creditors. “The guarantors will obviously feel this is against their interests but will now have to conduct their due diligence before entering into some arrangement,” he said.
Last year, in November, a three-judge bench of the apex court had upheld the constitutionality of Sections 95-100 of the IBC, which allow creditors to initiate insolvency proceedings against individual and partnership firm debtors. The decision had come after the Bench heard 391 petitions, including that of Reliance Communications, challenging the constitutional validity of these provisions.
Further, to strengthen right of the Committee of Creditors (CoCs), under the CIRP, the IBBI proposed that the insolvency professional (IP), who is the choice of highest number of financial creditors (FCs), shall be allowed to attend the meeting of the CoC after the interim resolution professional (IRP) submits the application for his appointment before the Adjudicating Authority (AA), or the NCLT.
As per the current practice, the IRP examines the books of accounts and other relevant records of the CD to ascertain the class of creditors of the CD, if any. If there are creditors in a class, the IRP obtains consent of three insolvency professionals to act as authorised representative (AR). The creditor in a class indicates its choice of an IP to act as its AR. The IRP selects the IP, who is the choice of highest number of FCs in the class and makes an application before the AA for his appointment as the AR. The AA then appoints the AR before the first meeting of the CoC.
However, it has come to our notice that in some cases, the appointment of the AR gets delayed, and as a consequence, the AR is not able to attend the meeting(s) of the CoC till his appointment, which hinders their ability to exercise their rights as financial creditors, the IBBI mentioned.
Jain said that since the AR has been proposed to act as AR in-interim and duly perform the duties, simultaneously till his final appointment by AA, it paves the way for seamless, efficient representation of creditors in a class and quick, efficient decision making is expected out of the move.
Moreover, on valuation of assets of micro, small and medium enterprises (MSMEs), the regulator has proposed that for resolving stressed MSME firms with liabilities up to Rs 1,000 crore, only one registered valuer, instead of the current requirement of two or three, should be involved to assess their fair and liquidation values; to reduce the time and costs associated with resolving smaller bankrupt companies, according to the discussion paper.
The proposals contained in the discussion paper aim to enhance clarity and efficiency in register valuer appointments during CIRP, advocating for one valuer in small companies and MSME cases, with flexibility for two if justified by the CoC, said Piyush Agrawal, Associate Partner, AQUILAW.