Many of the changes to the Insolvency and Bankruptcy Code (IBC), proposed in the Bill tabled in the Lok Sabha on Tuesday, were long overdue. To be sure, the corporate insolvency resolution process (CIRP) has been amended from time to time to plug loopholes—it was amended six times in the first five years. However, the mechanism continued to suffer from infirmities and, as was highlighted by the Supreme Court in its recent order in the Bhushan Steel-JSW Steel case, resolutions have come about at the cost of regulatory compliance. Among the key changes this time around is the introduction of a creditor-led resolution process which can be kicked off provided 51% of the financial creditors, by value, concur.
Creditor-led process for faster resolutions
This is primarily an out-of court process; an approval from the National Company Law Tribunal would not be required unless some party objects. Experts point out that the Reserve Bank of India (RBI) circular of June 2019 did, in a sense, empower creditors to initiate a CIRP, but it will now become more effective as this is being codified. On the plus side, a creditor-initiated resolution process should be faster and more cost-effective. It will reduce the burden on the judicial system and help minimise the disruption to the operations of the company. At the same time, however, one is not sure how well this arrangement will work since the board of directors would continue to run the business, supervised by the resolution professional (RP) who will be appointed by the Committee of Creditors.
The fact is that RPs have frequently been found wanting in their duties and corporate managements have not always played by the rules. To ensure there is no mis-governance, lenders would need to keep a close watch and strictly monitor the operations during the resolution period. Importantly, Section 7 of the Code will now be modified to specify that an application by financial creditors to initiate a CIRP must be admitted, if there is a default, and no other grounds shall be considered for deciding such an application. Moreover, on an application by a financial institution, the adjudicating authority must consider records of default from “information utilities” as sufficient evidence of a default. This will ensure that the timeline of 14 days to admit a case is adhered to; right now the average time stretches to a ridiculous 434 days.
New rules for asset sales and cross-border insolvencies
The proposed amendments will also streamline the CIRP by enabling the sale of assets as opposed to the sale of the company as a whole. Experts say that the rules would be acceptable to the courts and also give prospective buyers more confidence. Another meaningful change relates to cross-border insolvencies involving companies that have units overseas. Given how the existing framework is limited to bilateral agreements, a new set of rules with a dedicated legal bench to handle the proceedings is needed. The new group insolvency rules will help lenders address several problems—for example, they can extricate assets housed in one entity of a conglomerate when the liabilities are in another unit, something that was proving to be difficult. Again, a common set of professionals, and a common bench, would prevent duplication, speed up the process, and help lenders extract the best value for the assets. One hopes the changes will help lenders recover more from the insolvency process than they have so far.