By Rajesh Narain Gupta, Saroj Pandey
The fifth report of the Insolvency Law Committee (‘Committee’), published on June 15, 2022, addresses several issues faced in implementing the code and recommends amendments to improve it. The primary focus of this report’s recommendations is on the Corporate Insolvency Resolution (‘CIRP’) and its effect on the overall liquidation process.
Reliance on information utility
The Information Utility (‘IU’) provides information on a case’s status and progress to all stakeholders, including creditors and debtors. It also provides information about cases that have been transferred out of bankruptcy. To save the National Company Law Tribunal (‘NCLT’) time and efforts in procuring and examining a fresh set of information, reliance on records registered with IU has been suggested. This is in line with the relaxation provided for accepting applications under CIRP that practically take longer than the stipulated 14 (Fourteen) days. The ultimate aim is to expedite the process of default establishment by creditors such as financial institutions through undisputed information. This provision will extend to operational creditors in due course of time with the development of the IU infrastructure.
Exemption from moratorium
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) requires barring all legal proceedings against the corporate debtor during the moratorium period. This is to ensure that the corporate debtor is not harassed by creditors, who might seek a stay of execution on their claims by the Adjudicating Authority (‘AA’).
There has been ambiguity regarding avoiding certain transactions and improper trading during the insolvency proceeding. Clarifications have been provided by the Committee around these aspects, mentioning that the proceedings will continue as per the stipulated timelines despite the same not applying thoroughly to subsequent avoidance applications. The provision also demands furnishing details of the contract for pursuing avoidance proceedings and sharing the costs and benefits thereon.
Late submission of Resolution Plans
The unsolicited plans need to be submitted to the Committee of Creditors (‘CoC’) or the resolution professional within a stipulated time for a higher probability of approval. While there have been no standard regulations or guidelines for the acceptance of late submissions and revisions in the plans, there have been instances where such plans have been approved. To avoid discretion in this matter, as it is not considered a commercial decision of CoC that bars National Company Law Appellate Tribunal (‘NCLAT’) review, the Committee recommends an amendment in IBC to define the review mechanism for late submissions clearly. To further corroborate the process, the AA has also been directed to approve or reject the plans within a 30 (Thirty) day window.
Pre-pack and fast-track insolvency process
These new features introduced by the Committee Report comprise a two-step resolution process wherein the creditors agree to take a haircut on their debt in exchange for being paid within a few months while the company continues operating as usual. This does not mean that the look-back period will be curbed in favour of a swift process. But as the time between the filing of CIRP and the inception of insolvency proceedings will reduce, the look-back period will automatically normalise to make the initiation date feasible. IBBI has been advised to issue guidelines for CoC conduct to standardise the resolution process for enhanced effectiveness.
Stakeholders Consultation Committee (‘SCC’)
The SCC is a body mandatorily required to be constituted by the liquidator within 60 (Sixty) days of the commencement date under the Liquidation Process Regulations. The main objective of this committee is to help bring uniformity in laws relating to insolvency across states. The committee is found to support the IBBI discharge its functions and provide consultation to the liquidator.
Contribution by 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 contribute any amount. If CoC does not approve a resolution, secured creditors will be obliged to contribute towards it and reimburse the liquidators.
IBC has seen enormous amendments and clarifications from Judiciary which has enabled its robust working which is quite encouraging. The proposed recommendations are towards progressive side and shall certainly help in further success of the IBC process. Apart from the ones discussed above, there are certain other suggestions by the Committee regarding Voluntary Liquidation Process, subordinate legislation and operationalising the IBC fund to curb uncertainty and expand the scope of the existing provisions. It is expected that the Finance Ministry shall consider the latest recommendations for an improved process.
(Rajesh Narain Gupta, Managing Partner and Saroj Pandey, Partner, SNG & Partners, Advocates and Solicitors. Views expressed are the authors’ own.)