Comments on proposed changes to the Corporate Insolvency Resolution and Liquidation Framework under Insolvency and Bankruptcy Code, 2016
– Team Resolution (resolve@vinodkothari.com)
On 23rd December, 2021, the Ministry of Corporate Affairs has issued proposed changes to the Corporate Insolvency Resolution and Liquidation Framework under Insolvency and Bankruptcy Code, 2016[1] and has solicited comments on the same.
While we discuss the proposed amendments in details below, a bird’s eye view of the proposed amendments gives an indication towards a more creditor-friendly approach, wherein the creditors have been bestowed with extended powers such as right to initiate insolvency proceedings, as well as have become less burdened with the the proposed amendment of only producing IU records at the time of application. At the same time, the roles and responsibilities of the RPs/liquidators seem to have been further widened by making RPs and liquidators also responsible for investigation of avoidance proceedings.
Other ancillary amendments like commencement of look-back back period, timeliness in approval of resolutions plans follow the trend of making the resolution process free of loopholes as and when they are identified.
Below we discuss the proposed amendments in detail –
| Sl. No. | Reg. No. | Proposed Amendment | Comments |
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7(3)(a) | Enabling a swift admission process
The financial creditor shall, along with the application furnish –
IU authenticated records to establish default; Where such IU authenticated records are not available, and for all other financial creditors, current options of relying on different documents for establishing default may remain available.
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In order to reduce information asymmetries and provide quick access to verified financial information, IU framework was conceptualized.
RBI vide notification dated 19th December, 2017[2], had directed all the financial creditors regulated by it to put in place appropriate systems for submission of financial information to IUs
Now that all the banks and financial institutions have developed the practice of submitting information to IUs, it will become convenient for the financial creditors to establish default for the purpose of admission of claim. The step will certainly help in reducing the timeline for admission of claim u/s 7.
However, it must be noted that the Proposed Amendment does not close other options for proving debt – for instance, a record of default as available with any Credit Information Company, list of other documents viz. loan agreement, details of security. |
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19(1) | The cooperation to be extended to the interim resolution professional (or the resolution professional) under this provision is explicitly extended for collection of information for the conduct of the CIRP and filing of applications against avoidable transactions and improper trading. Further, the categories of persons who are required to cooperate under Section 19 should also include any other person deemed necessary by the interim resolution professional
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The widened scope of people required to cooperate, is essential to enable the RP/ Liquidator to conduct the preliminary assessment of the CD, to proceed with the CIRP process and identify avoidance proceedings, if any. For instance, upon implementation of the proposed amendment, the RP would be entitled to seek cooperation from the group companies of the CD to verify the legitimacy of transactions.
These proposed amendments come in light of the recommendations made by the Insolvency Law Committee in their Report dated 5th March, 2020 |
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43-51, 66 and 67 | Power to creditors (individually or collectively) or the CoC to initiate avoidance proceedings | As per the extant provisions, section 47 of the Code entitles the creditors to file an application against undervalued transactions if the RP fails to do so. Now, the Discussion Paper proposes to allow creditors to file an application in case of any and all avoidance proceedings identified under the Code. However, members and partners have been proposed to be explicitly denied to file such applications.
While this would ensure that creditors’ interests are secured in case of inaction by the RP or Liquidator, or in such cases where the RP/ Liquidator has reasons justifying non-filing of an application. Procedures to be followed by the RP/ Liquidator upon such application filed by the creditors must also be provided for so that such proceedings and material information thereof is on record and duly reported to IBBI, etc. Further, procedures to be followed by the creditors where the application is initiated by them should also be laid down. |
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25(2) and 35(1)(1) | Duties of resolution professional
Resolution professionals will also be responsible for investigating the affairs of the corporate debtor for identification of avoidable transactions or wrongful trading. Similar powers of the liquidator may also be provided for in Section 35(1)(l)
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As per the Code, the Resolution Professional/ Liquidator is required to report avoidance proceedings, the RPs being professionals appointed to carry out CIRP were not required to carry out an investigation to establish the same. Now, as per the proposed amendment, the resolution professionals/ liquidators shall also be responsible for investigating such transactions, which might lead to an additional burden and liability on the RPs who are required to carry out the entire process. |
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26 | Continuation of avoidance proceedings
Addition of Explanation: The proceedings for avoidance of transactions and wrongful trading can continue after the approval of a resolution plan by the AA in CIRP.
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The question of continuance of avoidance proceedings has largely been in discussion and deliberation. Now, the proposed amendments have explained that such proceedings shall continue despite completion of CIRP and have provided that –
● the resolution applicant shall mandatorily provide the manner of treatment of such proceedings in the resolution plan ● the resolution applicant may mention about the role and involvement of the resolution professional ● the resolution plan may mention the manner of distribution in case of recovery upon conclusion of the proceedings. It must however be noted that no mention has been done for the treatment of avoidance proceedings upon closure of liquidation process. While the extant Code makes it clear that pendency of avoidance proceedings shall not hinder the closure of liquidation process, it is suggested that the process followed in CIRP shall apply mutatis mutandis in case of liquidation too. |
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43(4), 46(1) and 50(1)
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Change in look-back period
(i) the threshold for the look-back period may be changed from the date of commencement of CIRP to the date of filing of the application for initiation of CIRP in respect of the corporate debtor that has been admitted; and (ii) the period between the date of filing and the date of commencement of CIRP may additionally be included in the suspect period for such transactions.
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As per the extant provisions, the look-back period in case of avoidance proceedings begins from the date of commencement of CIRP, that is, date of order of the AA admitting the process. However, it was noticed that significant time lags existed between the date of filing of application and that of admission. As such, RPs/Liquidators could not travel farther to the past transactions, due to which certain transactions escaped from being classified as avoidance transactions.
The proposed amendment would give a larger look-back time to the RPs/liquidators.
So as to mitigate this loophole, the proposed amendments provide that the look back period may be changed from the date of commencement of CIRP to the date of filing of the application for initiation of CIRP in respect of the corporate debtor that has been admitted as it would benefit the creditors at large. |
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31(1) | Timely approval of resolution plans
If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan within 30 days and which shall be binding on the corporate debtor and its employees, members, creditors, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan. Where the resolution plan is not approved within this time period, the AA shall record reasons in writing for the same
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It is out rightly held by the Hon’ble Supreme Court of India in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd. & Anr. (Civil Appeal No. 3224 of 2020) that, “the NCLT and the NCLAT should endeavour, on a best effort basis, to strictly adhere to the timelines stipulated under the IBC and clear pending resolution plans forthwith.”
It is understandable that the time limit of 30 days has been condoned in view of the various litigations pending between the parties and any delay in approval of resolution plan by AA would defeat the very object and purpose of the insolvency resolution process. |
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59 | Closure of Process Voluntary Liquidation Process
The closure of the process may be carried out by the corporate person subject to the same requirements as for initiation of the process, i.e., by way of a special resolution or members’ resolution and approval of creditors representing two-thirds in value of the debt where the corporate person owes debt to any person. If such approvals are made, the liquidator may be required to make a public announcement of the closure of the process and intimate concerned authorities such as the IBBI and the registrar.
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The language of the proposed amendment gives a hint that the instant closure refers to the premature closure of the process, that is, the said closure would not lead to dissolution of the company – instead, it would result in a assuming status-quo status of the Company prior to commencement of the VL process. Hence, this proposed amendment deals with withdrawal of the process in the same manner as it was commenced. However, in view of the intent, ‘closure’ may not be the right word to use; rather, ‘withdrawal’ may have been more appropriate. |
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224 | Central Government to prescribe a detailed framework for contribution to and utilisation of the IBC Fund.
Following may be added : (i) Amounts lying in the Companies Liquidation Account of the Companies Act, 1956 or the Companies Liquidation Dividend and Undistributed Assets Account under the Companies Act, 2013. The IBC Fund can support some expenses of resource-strapped insolvency proceedings, such as payment towards workmen’s dues, or for carrying forward avoidance proceedings, etc as a part of utilisation of IBC fund
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It is proposed that amounts lying in the Companies Liquidation Account of the Companies Act, 1956 or the Companies Liquidation Dividend and undistributed assets account under the Companies Act, 2013, shall be transferred to IBC Fund. within some specified period of time. So, that the watch can be maintained on the said related transaction. Moreover, it will ensure smooth and timely payment towards workmen’s dues, or for carrying forward avoidance. |
[1] https://ibbi.gov.in/webfront/Notice-Public-Comments-on-proposed-changes-to-IBC-231221.pdf
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11189&Mode=0
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