Proposed amendments to the IBC to improve its implementation efficiency
The amendments are being suggested to address grievances of lenders arising out of the prevalent legal framework for liquidation and to enable a time-bound liquidation process
The Insolvency and Bankruptcy Code, 2016(“IBC”)has been a law under evolution from the inception. It is commendable to see that necessary changes are being brought about each time resolution under IBC is saddled with issues, to pave the path for a better implementation of IBC. The proposed amendments are a step in this directionto ensure an effective resolution or liquidation of the corporate debtor. In this article, it is our endavour to highlight some of the key amendments that have been proposed:
(A) Mandatory commencement of insolvency process on occurrence of default: The Supreme Court in the matter of Vidarbha Industries Power Limited v. Axis Bank Limited directed that the adjudicating authority has discretion to admit or reject an application for commencement of insolvency process despite the existence of default. This discretionary element is sought to be settled by clarifying that the adjudicating authority while dealing with an admission application under Section 7 of the IBC is required to be satisfied with the occurrence of default and nothing more. This amendment seeks to take away the subjective element for admission of corporate debtor into the insolvency process.
(B) Clarity on treatment of security interest contemplated under statutes: The Supreme Court in the matter of State Tax Officer v. Rainbow Papers Limited directed that statutory authorities who are beneficiaries of charges created by operation of law under statutes are also to be considered as ‘secured creditors’ under IBC. Such directions led to resolution plans providing for payment of liquidation value to such creditors on par with that of secured financial creditors, with such amounts being typically adjusted from amounts which would otherwise be available for distribution to secured financial creditors. This concern of the secured financial creditors is sought to be addressed by stating that for a person to be considered a secured creditor, there has to be an underlying transaction to that effect and a person cannot be a secured creditor merely through operation of law.
(C) Real Estate Projects: With respect to real estate projects, the amendment intends to usher in project-wise resolution of corporate debtor being the promoter of real estate projects during the insolvency resolution on a case to case basis. Project-based resolution will ensure that the concerns of stakeholders of the project primarily allotees of that project are addressed as only stakeholders of that project will be involved in the project resolution as against involving all creditors of the corporate debtor whether they are involved in the said project or not.
(D) Pre-packaged resolution processes: Pre-pack is intended to resolve a corporate debtor in a quicker and cost effective manner and at the same time, ensuring business continuity with the least amount of disruption and ensuring value maximisation. With an intent to ensure that the benefits of pre-pack are available to a lager set out of corporate debtors it is proposed to: (i) extend the pre-pack provisions for debtors beyond Micro, Small and Medium Enterprises (MSMEs); and (ii) reduce the threshold for approving the filing of a prepack application to 51% of unrelated financial creditors as against the existing 66% of unrelated financial creditors. We anticipate that pre-packs will find more takers post these amendments.
(E) Structural amendments for approval and implementation of resolution plans: Since take-over of a corporate debtor on a ‘going concern’ basis is not possible in all scenarios which in turn leads to erosion of value as piecemeal sale of the corporate debtor will then happen in liquidation, it is proposed to permit the committee of creditors to approve invitation of multiple resolution plans. Such multiple resolution plans are proposed to be approved and implemented independently from each other so that a holistic resolution of a corporate debtor is achieved.
In order to further streamline the insolvency process and to limit delays caused due to various challenges and litigations interse amongst stakeholders of a corporate debtor, IBC is proposed to be amended: (a) to provide for a statutorily prescribed equitable scheme or formula of distribution of proceeds to creditors and stakeholders; and (b) to permit approval of the overall resolution plan and the mechanism for distribution of proceeds independently from each other.
Conduct of challenge process as part of the bidding for finalization of the financial proposal is proposed to be made mandatory in all insolvency processes, to enable transparent consideration of all competing plans. Such challenge process has been used recently by creditors in matters such as Reliance Capital, SREI Infrastructure and SREI Equipment Finance. Such amendments have been suggested by IBBI keeping in mind the objective of providing for insolvency resolution in a time bound manner for maximisation of value of assets of corporate debtors.
(F) Structural amendments for liquidation processes: For corporate debtors with no meaningful or recoverable assets, the adjudicating authority is proposed to be empowered to permit the direct dissolution of such corporate debtor where it is of the opinion that it is just and reasonable to do so, based on a request by the committee of creditors of such corporate debtor.
In order to avoid repetition of activities which have been carried out duringinsolvency processes and delays caused as a result thereof, verification of claims afresh and identification of avoidance transactions afresh during the liquidation processare sought to be removed.
Since commercial decisions of creditors can also provide direction during theliquidation processes, it is proposed that a committee of creditors with broad-based representation from all creditors would continue to hold meetings during liquidation to supervise the liquidation process and support the functioning of the liquidator. For assets over which security interest has been created in favour of multiple lenders, it is proposed that the general presumption would be that all such lenders have relinquished their corresponding security interest, unless all such lenders have decided to realize their security interest outside of the liquidation process. These amendments are being suggested to address grievances of lenders arising out of the prevalent legal framework for liquidation and to enable a time-bound liquidation process.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.