Regulatory developments in Insolvency and bankruptcy law in 2022 – a quick round-up
– Sikha Bansal, Partner & Barsha Dikshit, Partner | resolution@vinodkothari.com
IBC, in a very short span of its life, has undergone multifarious amendments. In 2022, there were no amendments in the Code, but almost all regulations were amended. Majority of the amendments aimed at compressing the timelines. Few other amendments filled the gaps in law and provided clarity.
A quick snapshot of the key changes introduced in the CIRP regulations, Liquidation regulations, voluntary liquidation regulations and IP regulations, in the year 2022 is provided below. A brief discussion can also be referred to in our video on the same.
Key Amendments in IBBI (Insolvency Resolution Process For Corporate Persons) Regulations, 2016[1]
IBBI introduced several changes in the IRPCP Regulations vide Notifications dated 9th February, 2022, 14th June, 2022, 13th September, 2022, 16th September, 2022, and 20th September, 2022. The amendments mostly focused on reducing the timeline of corporate insolvency resolution process, removing ambiguities, facilitating IPs thereby increasing value and realisation for stakeholders.
Resolution Professionals have been empowered to invite EOI for resolution plans for one or more assets of CD with approval of CoC, if no resolution plan for CD is received within the given timeline. Resolution plan shall also provide for the manner of pursuing avoidance transaction application and distribution of realisation therefrom, if any. Timelines for certain activities during CIRP have been reduced.
Further, the regulations now also provide for payment of a regulatory fee at the rate of 0.25% of the realisable value under approved resolution plan to the Board w.e.f 1st October, 2022 which will form part of CIRP cost.
Key changes in IBBI (Liquidation Process) Regulations, 2016[2]
IBBI, vide notification dated 28th April, 2022 and 16th September, 2022, have introduced several changes in the Liquidation Regulations. Some of the key changes introduced in the year 2022 are as follows.
SCC has been reconstituted so as to facilitate participation of the wider range of stakeholders based on their voting percentage in the overall admitted claim. While role of SCC is still advisory, however, the same has been enhanced to include advising w.r.t. Liquidator’s fee, conducting valuation and manner of pursuing avoidance transaction proceedings post dissolution of the corporate debtor. Further, if the liquidator takes a decision contrary to the advice of the SCC, the regulation now requires the Liquidator to record the reason of deviation and file the same with the NCLT and IBBI.
Certain amendments intend to focus on saving time – for instance, liquidators are permitted to try going concern sales , exclusively, in the first auction only. If the liquidator fails to sell the corporate debtor as a going concern in the first auction, the subsequent auctions shall be conducted for the remaining modes provided under regulation 32, although GCS can also be one of the options. Timelines have been squeezed for several sub-processes under the regulations.
The regulator also brought in much needed clarity w.r.t. treatment of avoidance transaction proceedings after dissolution of the CD/ completion of the liquidation process. It is now upon the SCC to decide the course of action for such proceedings, which the liquidator shall include in the final report and application. This would facilitate closure of liquidation proceedings, which in some cases, were denied by the adjudicating authorities citing pendency of avoidance proceedings.
Overview of changes in IBBI (Voluntary Liquidation) Regulations, 2017[3]
VL regulations have been amended vide Notification dated 16th September, 2022 to allow only 90 days for completion of voluntary liquidation of companies where there are no creditors. Also, in order to assist NCLTs, the regulations now require the liquidator to attach a compliance certificate providing details w.r.t. compliances within the given timelines and reason of deviation from the same, if any. The Regulation also requires the majority of directors of the corporate person to make arrangements for preservation of records of the corporate person post dissolution and make a declaration in this regard before commencement of the liquidation process, i.e. at the time of providing declaration of solvency.
Key changes in IBBI (Insolvency Professional) Regulations, 2017[4]
There were 3 amendment notifications issued during the year; however, mostly those intended to consolidate past circulars on same subjects, including the one which obligates IPs for losses and penalties I incurred on account of non-compliance of any provision of the laws applicable on the corporate person while conducting the processes under IBC
Surprises from the judiciary
This year also saw a few rulings from the judiciary which, humbly speaking, came as a surprise as the rulings went against the common understanding. For instance, in State Tax Officer vs. Rainbow Papers Limited, Hon’ble SC held that by virtue of the ‘security interest’ created in favour of the Government under GVAT, the State is a ‘secured creditor’ as per the definition in IBC and thus, debts owed to the State be put at the same pedestal as the debts owed to workmen under the scheme of section 53(1)(b)(ii)[5].
Further, in Vidarbha Industries Power Limited v. Axis Bank Limited, the Hon’ble SC held that the provisions of section 7 (5) (a) of IBC is discretionary in nature. Thus, insolvency proceedings against a corporate debtor cannot be initiated merely on account of temporary inability to pay off the financial debts.
In Sunil Kumar Jain and others vs. Sudarshan Bhatt and other, it was held by the Hon’ble SC that the salaries/wages payable to employee/workmen for the CIRP period shall be included in the CIRP costs only when it is proved that the corporate debtor was a going concern during the CIRP period and the workmen/employees claiming their dues for the CIRP period have actually worked during the CIRP while the CD was a going concern.
However, in PTC India Financial Services Limited vs. Venkateswarlu Kari and others, the Hon’ble SC extensively reviewed the law on pledges[6], and clarified the rights of the parties in the context of pledges created on dematerialised shares.
The rulings appear to be the final word from the judiciary; however, it would be interesting to see what course the law takes. Further, the purpose of the amendments might have to address the delays in IBC processes; however, it is also important to understand and acknowledge that one of the major drawbacks in IBC is delay in Adjudication proceedings. NCLT Benches are overburdened with vexatious litigation with no fear of penalty/costs, etc., routine, non-adjudicatory matters etc. Hence, rather than reducing the timeline of CIRP and Liquidation process, reforms are needed to declog the NCLTs so that matters which are non-adjudicative in nature do not need to go before the Benches and Benches can focus on Core matters.
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[1] https://ibbi.gov.in//uploads/legalframwork/2022-09-24-141440-swkb7-8ba68849180f8f4325072cc149437c26.pdf
[2] https://ibbi.gov.in//uploads/legalframwork/96336b3a0719873fa6bec3661203c1a7.pdf
[3] https://ibbi.gov.in//uploads/legalframwork/502221417edc8c995e6971fad60d3184.pdf
[4] https://ibbi.gov.in//uploads/legalframwork/213cd7f2c53374800f7cf1e881b58d51.pdf
[5] See our analysis of the said ruling here https://vinodkothari.com/2022/09/supreme-court-ruling-revives-the-quandary-holds-tax-authorities-to-be-secured-creditors/
[6] See our detailed article here: https://vinodkothari.com/2022/06/broken-pledge-apex-court-reviews-the-law-on-pledges/
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