Comments on the MCA Discussion Paper on changes being considered to IBC, 2016

– Team Resolution, Vinod Kothari and Company | resolution@vinodkothari.com

The Ministry of Corporate Affairs (‘MCA’) issued a Discussion Paper on 18th January, 2023 on changes being considered to the Insolvency and Bankruptcy Code, 2016 (‘Discussion Paper’). Since the very inception of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), it has undergone six amendments besides, several amendments in the respective regulations. However, the proposals in this Discussion Paper seem to be the most comprehensive one – covering all major aspects of the law.

Broadly speaking, the amendments proposed in the Discussion Paper can be categorized as follows:

1. Proposals that try to overcome past difficulties:
   1. Voting in CoCs, direct dissolution, etc
   2. Enhancing the scope of pre-packs and fast track insolvency
2. Proposals that codify amendments in regulations already done or IBBI circulars:
   1. Mandatory filing of information of default with IU
   2. Presumption of relinquishment of security interest
3. Proposals to override or respond to some court rulings:
   1. Vidarbha Industries Power Limited v. Axis Bank Limited
   2. State Tax Officer v. Rainbow Papers Limited
   3. Gujarat Urja Vikas Nigam Limited v. Amit Gupta & Ors
4. Fundamental or progressive amendments:
   1. Partial resolution
   2. Collapsing the levels in the waterfall
   3. Separation of resolution and distribution
   4. Resurrection of entity from liquidation to resolution
   5. Aggregation of assets of guarantors
   6. Collaboration for the purpose of group insolvency

Following are our specific comments on each of the proposals made in the Discussion Paper

    1.          Use of technology in IBC

Proposal: E-platform may provide for a case management system, automated processes to file applications with the AAs, delivery of notices, enabling interaction of IPs with stakeholders, storage of records of CDs undergoing the process, and incentivising participation of other market players in the IBC ecosystem.

Our views: The proposal is a welcome step as it may also set the tone for introduction of artificial intelligence tools for easing out the functions of the judiciary and other stakeholders. However, there might be a further need to streamline reporting requirements and think of a single window repository and information reporting window; such that there is no duplication of submission requirements and the regulators and insolvency professional agencies can access the information anytime from the repository.

    2.          Admission of CIRP Application based on IU records

Proposal: Amendments have been proposed in sec. 215. Admission of application u/s 7 and 9 shall be based on the data of IU only. Such IU record shall be deemed to be conclusive proof about the occurrence of default. In limited cases where the record is not available with IU, AA, on genuine reasons to be shown, consider other evidence. Additionally, CD/debtors shall be provided a reasonable opportunity to respond to the information submitted. To prevent recalcitrant debtors from causing delays, information shall be deemed to be authenticated if no response is received within a stipulated time period.

Our views: The following may be noted –

• OCs are not required to file information relating to the transaction at the time of entering into the transaction, unlike in case of FCs where financial information is to be filed at the inception. However, OCs will be required to file information with the IU before filing the application. While it is intended to use IU as a conclusive evidence of default; however, in reality, IU may be used by the debtor as a tool to raise dispute at the application filing stage. Hence, the provision may actually be counterproductive.
•  Relying solely on IU may make the process inflexible, particularly for operational creditors. If there is a default and the OC has sufficient proof of it, IU records need not be mandated for reasons as stated above. Further, filing with IU has cost implications too. Therefore, OCs would now be faced with barriers as to addition of one more complex process as well as cost to initiate the process under IBC.
• Information shall be deemed to be authenticated if the CD/debtor does not provide a response within stipulated time; however, what about a scenario, where the CD/debtor raises a dispute/objects to the information at that stage. In such cases, even after having sufficient evidence of default outside of IU, the default would not get authenticated in the IU. This would make the process counter-intuitive.
• There are already multiple registries/debt repositories mandated under law (RoC/CERSAI). Law cannot lose sight of the same, and reject authentic sources of such information to prove existence of debt.

 It may also be noted that reg. 21A of CIRP Regs. has been already introduced where both FCs and OCs need to ensure records from IU before submission of application. Such regulation may also be reconsidered.

    3.          Mandatory to admit an application filed under section 7 where occurrence of a default is established

Proposals:

1. While considering an application under sec. 7, the scope of the AA’s power in this regard is limited to determination of default, and the provision does not require the AA to consider other factors or circumstances regarding the inability of the CD to repay its debts. However, in case of Vidarbha Industries Power Limited v. Axis Bank Limited, (Civil Appeal No. 4633 of 2021), a contrary stand was taken by the SC wherein it was held that  AA has the discretion to admit or reject an application u/s 7 of IBC despite existence of a default. Consequently, it is observed that the AAs delve into detailed factors relating to the solvency and financial health of the corporate debtor, which is not required as per the original intent of the law. Hence, it has been proposed to clarify (by way of amendment in sec. 7) that the AA is only required to be satisfied about the occurrence of a default and fulfillment of procedural requirements for this specific purpose (and nothing more). Where a default is established, it is mandatory for the AA to admit the application and initiate the CIRP.
2. The timeline of 14 days provided in sec 7 has been interpreted to apply only for ascertainment of default. However, it is also intended to apply to the AA’s decision to admit or reject the application under section 7(5). Accordingly, suitable amendments are proposed to clarify the applicability of the timeline to that provision as well.

Our views:

1. The proposed amendment is important for the purpose of reinstating the intent of the Code. After its enactment, the Code had ruled out the solvency test and relied solely on whether the entity has defaulted in payment (for any reason whatsoever) . The Vidarbha Judgement sought to provide discretion to NCLT in admitting (or not admitting CIRP application) even if there is a default. However, it may be noted that the judgment in Vidarbha has been submitted for review, and an aligned outcome might be expected. As such, the amendment may not be needed, per se.
2. As regards the amendment in sec 7 is considered for including the time taken by AA for admitting or rejecting an application within the prescribed timeline of 14 days, the same seems to be a clarificatory amendment.

    4.          Restricting the right of the promoters to propose an interim resolution professional

Proposal:  No right to the promoters to propose the name of IRP in case of sec. 10 application. AA to appoint on recommendation of IBBI.

Our views: Section 10 application has become a rarity, owing to implications of sec. 29A. Data suggests that till September, 2022, just 350 cases were initiated u/s 10 by the CDs. However, MSMEs enjoy certain exemptions from sec. 29A and may have the motivation to file under sec. 10. Even in those cases, the RP shall be appointed on recommendation of IBBI, and the promoters/applicant will not have the right to choose the interim RP.

    5.          Empowering the AA to impose penalties for violations of the Code

Proposal: The proposal is two-fold –

• Sec 235A to be converted into civil penalty. Right to AA to penalise for non- compliance of the provisions of the Code. The proceedings may be initiated on an application made by the IBBI or any other person authorised by it in this regard
• Second proposal seeks to empower the AA to impose a penalty where the AA believes that such a person has filed frivolous or vexatious applications.

Minimum penalty 1 lakh per day which may extend to three times the loss caused or unlawful gain, whichever is higher.

Further, it is proposed to amend sec. 29A to empower the AA to bar such a promoter from being a resolution applicant and submitting a resolution plan in the CIRP of any CD. The AA, while exercising this power, shall be required to consider the conduct of the promoter in the relevant CIRP and the gravity of the contraventions committed

Our views:

On decriminalisation of sec. 235A – At present, Section 235A of the Act is a miscellaneous provision, which when read in conjunction with the next section i.e., Section 236, provides for punishment in cases where no specific penalty or punishment is provided. These offenses have been designated to be tried  by a special court established under Chapter XXVIII of the Companies Act, 2013.

It is also important to distinguish between civil wrong and criminal acts as acts of  fraud, wilful defaults are criminal activities which cannot be equated with civil wrongs.

On frivolous applications – Frivolous applications are filed by vested interests or parties intending to derive some underlying benefit with mala fide intent. Such applications waste the time of the court and hamper the smooth conduct of proceedings. As such, the proposal seeks to impose penalty on such frivolous applications

On sec. 29A amendment – A reading of clause (c) of section 29A indicates that the law at present, debars any promoter (and not only the promoter of the CD with respect to which resolution plan has been invited) who falls in that category from submitting a resolution plan. Hence, the scope and intent of the proposal is not clear. 

    6.          Fast Track CIRP

Proposal: Unrelated FCs of a CD to select and approve a resolution plan through an informal out-of-court process and involve the AA only for its final approval or for moratorium if the same is needed. Detailed process is proposed to be specified by the IBBI for ensuring that out-of-court process retains the core element.

Our views: The ambit of fast track CIRP is anyways extremely narrow. Notification u/s 55(2) has prescribed a small co., a startup (other than partnership firm) or an unlisted company with total assets not exceeding one crore as eligible CDs for fast track insolvency resolution process. On a divergent angle, the minimum default amount for initiating any CIRP proceeding under IBC is also fixed at Rs. one crore. Therefore, to make fast track CIRP achieve its objective and gain some momentum, the first change that should be brought to light is to increase such threshold limits and reduce the involvement of AA to the extent possible.

    7.          Expanding the applicability of the Pre-packaged Insolvency Resolution Process-

Proposal: Prepacks are currently applicable only in case of MSMEs, and come laden with multiple approvals. It is being considered that section 54A be amended to provide that the framework for pre-pack shall apply to prescribed categories of CDs in addition to the MSMEs.

Our views: Pre-pack resolution means pre agreed resolution. However, the current framework provides for 2-stage approval of the AA, one at the admission stage (after BRP is prepared) and second at the approval stage (BRP vs. BAP) which makes the  process equally cumbersome. Therefore, the potential amendment required here is to first provide for a single window clearance in case of pre-pack resolution and lessen down the involvement of AA in the process.

    8.          Improving Outcome in real estate cases

Proposal: The jurisprudence has evolved to classify ‘house allottees’ as Financial Creditors. Being classified as FC, makes them part of the Committee of Creditors.  However, due to their inherent nature, there arises a dissimilar interest with other FCs which does not align with the scheme of the CIRP.
Thus, it is being proposed that when an application is filed to initiate the  CIRP against the Corporate Debtor, being promoter of a real estate project, then the Adjudicating Authority , at its discretion, may admit the case but apply the CIRP provisions only to such projects, which have defaulted. The same shall lead to a segregation of such projects from the larger entity for the limited purpose of resolution.

Our Views: Entity level CIRP in real estate cases may hinder even otherwise solvent projects. Subject to appropriate separability of assets and liabilities pertaining to the project under consideration, the proposal seems to be feasible.

    9.          Reimagining the consideration of the resolution plan and the manner of distribution of the proceeds from the same during the CIRP 

This proposal is a set of various critical proposals in relation to submissions and implementation of resolution plan, as discussed below-

• Approval of multiple resolution plans (for separate assets)

Proposal: At present, the CoC cannot approve two or more resolution plans, either providing for the sale of the assets of the CD or its insolvency resolution as a going concern; that is, the plan must provide for insolvency resolution as a going concern. It is now proposed that CoC may approve that individual or collective assets of the CD may be resolved in one or more resolution plans. However, at least one of the plans ought to provide for insolvency resolution of the CD as a going concern. Upon approval of a resolution plan by the AA, it shall be implemented pending approval of other plans in the CIRP, if any. CIRP will terminate the CoC and the AA have approved and finalized resolution plans for all the assets of the CD and insolvency resolution of the CD as a going concern.

Our views: Pursuant to amendment notification dated 16th September, 2022 CIRP regulations were amended to include provision w.r.t. piecemeal resolution-

• Reg 36B (6A) – if the RP does not receive resolution plans in response to RFRP, he may, with approval of the CoC, issue RFRP for assets of the CD
• Reg 37 (1) (m) – Resolution Plan may provide for sale of one or more assets of CD to one or more successful RAs, and the manner of dealing with the remaining assets

Code is proposed to be amended to enable resolution of individual or collective assets of the CD in one or more resolution plans. The idea of a fractional or partial resolution may imply that the CD consists of multiple “undertakings”, each having clearly identified assets and liabilities, where some of the undertakings may be healthy and some may not be. Hence, consolidated resolution of the entire entity creates a drag on those that are more liquid, or valuable. Additionally, it would be a question of valuation, where the sum of the undertakings should be higher than the value of the whole of the CD.

There might be some connected questions as in who are the creditors who approve the resolution – entity-wide creditors, or enterprise creditors? Most important question is one of waterfall – is the waterfall limited to the undertaking, or does it extend to the enterprise? However, the Discussion Paper seems to suggest that it is only the timing of the resolution of some parts which may precede others; it is not envisaging whether the rest of the resolution may not happen at all

• Separation of resolution plan and distribution of proceeds

  Proposal:Presently, a resolution plan provides for distribution of proceeds to the OCs under sec. 30(2).  The AA, at the time of approving the resolution plan has to verify that the plan conforms by the prescribed manner of distribution, and provides the minimum entitlement for the OCs and dissenting FCs.

It has been observed that the CIRP is severely delayed due to numerous objections which are filed with the RP regarding the distribution of proceeds when the resolution plan is pending approval before the AA.

Therefore, it is being considered that the Code may be amended to segregate the concept of the resolution plan from the manner of distribution of proceeds received

Our views:The move is welcomed and appreciated, and will certainly go a long way in saving time, and avoiding unnecessary disputes over inter-se rights. It is implicit from the proposal that distribution of the proceeds shall now be the role of the CoC. It is actually in the interests of every stakeholder that the Resolution Applicant is freed from deciding the appropriate amount for each class of creditors in the plan, and the same shall preferably vest in the domain of the CoC.

• AA to provide an opportunity to cure the defects in the resolution plan

Proposal: Sec. 31 may be amended to clarify that the AA can send the resolution plan back to the CoC for curing certain curable defects.

Our views: ue There is much ambiguity in the plan with respect to the terms ‘curable defects and ‘cure’. There does not seem to be appropriate clarity on what kind of ‘defects’ the proposal talks about and what constitutes ‘curable defects’. It has been held in many judicial precedents that AA cannot seek modification of the plan . For instance, the NCLAT in the case of QVC Exports Pvt. Ltd. vs RP Deloitte Touche Tohmatsu India^[1] had held that a resolution plan which attains finality cannot be subsequently modified by the order of the tribunal,

• Other proposals

Proposal: Other proposal includes mandating use of a challenge mechanism and constitution of a monitoring committee for monitoring and supervising the implementation of the resolution plan(s)

Our views: Constitution of a monitoring/supervisory committee for the purpose of implementation of resolution is a common feature. It does not need to be mandated by law, and should be left to the discretion of CoC which can take such decisions in their own best interests and that of the other stakeholders.

10.          Reinstating CIRP

Proposal: The Code may enable reinstatement of the CIRP during the liquidation process, where the liquidator continues to carry on the CD’s business, and it is possible to revive the CD as determined by the CoC. Further, where an approved resolution plan is not implemented or a plan gets rejected under section 33 (1) (b), and the CoC believes that the CIRP may be reinstated, it may be empowered to apply to the AA for such reinstatement.  However, it will be at the discretion of the AA to either reinstate the CIRP or pass a liquidation order for the CD, or continue with the liquidation process, as the case may be.

Our views: First of all, it is important to note that IBC was founded on the basic premise of the essence of time. BLRC, in its report,  envisaged that preservation of time value is the most important principle driving the design of the liquidation process. In that light, the proposed amendment may be avoided as implementing it will render redundant the defined time-limits for CIRP and liquidation process. These timelines encourage the stakeholders to act quickly and efficiently. It is the finality attached with these timelines that make them effective and thus it is preferable that their sanctity is honored. Further, it is not really reasonable to leave the distressed entity lurking between life and death.

Creditors have to understand the finality of the resolution process. Either the resolution has to succeed or the entity should face a terminal path – ease of liquidation in non-viable cases provides an ease of exit to unviable entities.

11.          Intermingling the assets of the CD and its guarantors-

Proposal:

• In case the assets of the CD and its guarantor (corporate or personal) are so closely or inseparably linked, a mechanism should be provided under the Code to include such assets of the guarantor in the general pool of assets available for the CIRP for efficient resolution of the CD.
• In a case where the secured creditor has taken possession of a secured asset of the guarantors of the CD (security interest over which was created to secure the repayment of the CD’s debt) under the SARFAESI Act, 2002, that is linked to the CD’s assets, she may have the option to sell such assets through a special window created under the CIRP process.

Our views:

• In general, guarantee contracts may be unsecured in nature; that is, the guarantor may not have created security interest on its assets. Hence, the creditors of the CD will only have general right over all the assets of the guarantor. This general right may be subject to specific rights which the guarantor might have created in favour of its own creditors. In such a case, the guarantor in question has to be brought into insolvency, before there is a question of reaching out to the assets
• Basic principle is that no creditor can reach out to the assets of a creditor, except by way of enforcement of security interest, or attachment under law or civil process. If indeed the guarantor is brought into CIRP, then this proposal may be akin to group insolvency.
• Hence, inclusion of assets of the guarantor in the pool of assets of CD may be subject to various factors – the creditors involved, the type of security interest created.

12.          Resolving inter-dependent entities:

Proposal: The proposals provide for a common AA and common RP in these cases where there exist related parties in the nature of holding, subsidiary or associate companies of the CD, or, a subsidiary of a holding company to which the CD is a subsidiary. It has been further envisaged that CoCs of two separate CDs may file an application seeking cooperation and coordination of the CIRPs concerning the CDs.

Our Views: The proposal is based on the aspect of establishing co-ordination between related entities for a better and efficacious resolution of the entities. Cooperation and coordination are preferred over substantive consolidation in group insolvencies. See detailed discussion here – https://vinodkothari.com/wp-content/uploads/2019/06/Entity-vs.-Enterprise.pdf

13.          Improving recoveries for operational creditors in liquidation-

Proposal: All unsecured creditors (FCs, OCs and any government or authority) other than the workmen and employees shall be treated equally for distribution under section 53.

Our Views: The proposal is to have a more compact version of section 53. The move is much welcomed as there is no rationale for distinguishing creditors on the sole basis of financial and operational. All unsecured creditors (whether operational or financial) should  stand on the same footing in the waterfall mechanism.

14.          Clarity in the treatment of security interests created by statutes-

Proposal: Recently, in the case of Rainbow Papers v State Tax Officer, the Supreme Court held that a ‘security interest’  under IBC can also be created by operation of law and a statute, and can accord the status of a ‘secured creditor’ to the government authorities. It is felt that the definitions of ‘security interest’ and ‘transaction’ provided under Section 3(31) & 3(33) of the IBC respectively, when read together make it amply clear that a security interest can only be created by a transaction which is contractually agreed upon by two or more parties, based on their commercial considerations. Thus, it is being considered that all debts owed to Central Government and the State Government, irrespective of whether they are secured creditors pursuant to a security interest created by a mere operation of statute, shall be treated equally with  other unsecured creditors.

Our views: The Supreme Court’s observation in the case of Rainbow Papers diverted from the well-established jurisprudence around the subject matter of the conflict between the IBC and tax statutes and the question of priorities between these. Our detailed article is here – https://vinodkothari.com/2022/09/supreme-court-ruling-revives-the-quandary-holds-tax-authorities-to-be-secured-creditors/ . The proposal aligns with the views expressed by the author in this article.

15.          Disclosure of valuation estimate of assets in the IM-

Proposal: Presently, the information memorandum shared with the resolution applicants for preparing the resolution plan does not contain a valuation estimate of the assets. Thus, it is being considered to amend section 29 to provide that the information memorandum shall contain an estimation of the valuation of the corporate debtor’s assets.

Our views: The same is a good move as this will allow the resolution applicants in making an informed decision based on the defined value of assets vesting with the corporate debtor.

16.          Certain categories of OCs to honour the agreement with the CD for the remaining useful life of the agreement-

After approval of the Resolution plan, CG, SG, local authority, or any statutory authority with whom such an arrangement subsists, shall continue to honour the arrangement during its term.

Proposal: Currently, the successful resolution applicant faces difficulties when certain OCs seek termination of their subsisting agreements and extinguishment of their liability on account of insolvency of the CD, after the plan is approved. To remedy such problems, it is being proposed that anti-deprivation principles should be extended and applied to certain agreements, in the implementation period, that is after the resolution plan is approved. Such principles shall only extend to contracts executed between government entities.

Our Views: While the move is certainly appreciated, the same should also gradually extend to entities which are not sovereign, as is the global practice. The proposed amendment will only provide half shield to such entities, as private entities (which may or may not be creditors) could still deny their obligations under the agreement, citing termination on the ground of insolvency of the  CD.

17.          Protection of a resolution applicant post implementation of the resolution plan concerning civil liabilities-

Proposal: Post-approval of the resolution plan, No proceedings commenced or be continued by any government or authority regarding the claims arising before the commencement of the CIRP, unless otherwise provided for in the resolution plan, and such claims shall stand extinguished.

Our Views: The move is welcomed as the codification of the ‘clean slate’ principle will ensure that no claims are filed post the approval of the resolution plan, and all such claims shall stand extinguished. However, notably the proposal only talks about claims from any government/authority, and does not mention other types of dues.

18.          Clarity on the computation of voting share and treatment of abstention-

Proposal: The Voting share defined u/s 5(28) implies the share of the voting rights of a single FC in the CoC. This is in proportion of the financial debt owed to such FC to the entire financial debt owed by the CD. This definition, in turn, leads to the inclusion of debt held by related FCs as well in the denominator. However, as these related FCs are barred in the CoC, there is an inherent contradiction in the definition.

Thus, to cure the contradiction, it is being proposed that the voting share be now computed as a proportion of financial debt owed to only those concerned FC who are the members of the CoC and are eligible to vote. Further, an effort has also been made to address the problem of abstention in voting in the meeting of CoC.  The voting threshold for major decisions is being proposed to be revised to 2/3rd of the CoC members present and voting in a meeting. However, members approving such a decision should constitute at least ≥ 51% of the total voting share of the CoC.

Our Views: This may be, by far, the most important change at least when it comes to speedy decision-making by the CoCs. The proposal is two-fold:  disregard absentees in voting subject to 51% condition, and disregard related parties in assessing proportion.

Regarding the proposal to address abstention from voting, voting threshold for major decisions proposed be revised to 2/3rd of the CoC members present and voting in a meeting and members approving the decision should constitute ≥ 51% of the total voting share of the CoC. In essence, therefore, abstainers may still deadlock the decision. This means if 25% or more of the voting rights abstain, that will deadlock the decision. As for FCs being related party, the votes will be excluded both from voting as also from denominator

In any case, the effort is certainly in the right direction, as it seeks to tackle unnecessary hindrance in the smooth conduct of CIRP. 

19.          Incentivising interim finance providers-

Proposal: Interim Finance providers can attend CoC meeting as non-voting members to keep themselves informed about the proceedings under the Code.

Our Views:   In terms of Reg. 2(1)(ea) of Liquidation regulations,  liquidation cost includes interest on interim finance for a period of 12 months or for the period from the LCD till repayment of interim finance, whichever is lower. There was a discussion in the IBBI Discussion Paper dated 14th June, 2022 to include interest on interim finance till repayment in liquidation cost. The amendment notification, however, did not reflect the same.

Present proposal merely allows interim finance providers to participate in the meetings of the CoC as non-voting members. Thus, the interim finance providers merely become ‘mute observers’. This may not be a sufficient step to incentivise interim finance. Need is to expand such incentives from mere participation to some commercial interest. It may be more encouraging and incentivizing for the interim finance providers to provide them with interest on the whole period during which the interim finance was availed.

20.          Appointment of Administrator by the Central Government-

Proposal: It is being considered to insert an enabling provision in the Code for the Central Government or any other authority as may be prescribed or authorised in this behalf, to propose the appointment of an ‘Administrator’ in specific CIRP cases involving public interest for performing all the duties of an IP, IRP, RP, or liquidator, as the case may be. Under this proposal, the processes will be conducted as per the Code’s provisions for regular cases, except that the CoC will not have the power to remove or replace such an Administrator (and such power shall only vest with the Central Government or any other authority as may be prescribed or authorised in this behalf).

Our Views: As per existing provisions u/s 227, CG can notify FSPs to be covered by IBC. As such, separate rules notified for appointment of administrator, and conduct of CIRP for notified FSPs. However, the proposed amendment seeks to cover CDs which may not be FSPs (that is, which are covered under the definition of CD under the Code). The phrase ‘public interest’ imports a very wide meaning; thus it is desired that the contours of this should be explicitly defined so as to maintain certainty in the procedure of the Code. Some clarification in this regard is required and the same shall aid in clearing the ambiguity.

21.          Power to exempt a class or classes of corporate persons from provisions of this Code-

Proposal: Sec 462 of Companies Act, 2013 provides power to CG to exempt class or classes of companies from provisions of Companies Act, 2013.

Similar provisions are being proposed to be included in IBC framework. These will include exempting a class of CD from the applicability of the provisions of the Act, or applying its provisions with certain exceptions, modifications and adaptations subject to procedural safeguards

Our Views: It is desired that the basis on which such exceptions would be made is clearly expressed in the Code. This shall act like a safeguard against any discretionary usage of the power.

Recasting the Liquidation Process

23. Direct dissolution of CD-

Proposal: where the CoC requests that the CD should be dissolved without undergoing a liquidation process, the AA should allow the dissolution of the CD in such cases where it thinks it is just and reasonable to do so.

Our Views: Presently, the liquidation process is required to be conducted even if CD has no meaningful or recoverable assets. Early dissolution is still allowed under reg. 14 of Liquidation Regulations anytime after preliminary report is prepared by liquidator, where realisable properties insufficient to cover liquidation costs and affairs of CD do not require further investigation. Running an entire liquidation process in such a situation becomes cumbersome and exorbitant. However, as of now, direct dissolution is not explicitly permissible under the Code/Regulations. But, there have been rulings in the past where the AA has allowed direct dissolution after a failed CIRP – see orders in Synew Steel Private Limited, and Aesys Technologies Private Limited.  Hence, the proposal seems to be a welcome move. reg.

24. Eliminating duplication of activities between the CIRP and the Liquidation Process-

Proposal: Omit sections 38 to 42 and the requirement to invite fresh claims under section 35 (1) (j). Liquidator to continue avoidance transaction if initiated during CIRP.

Our Views: The move is welcomed as the same will, to the extent possible,  lessen the overlap existing between the two procedures to save time. However, it is required to be mentioned here that at the liquidation stage, the claim from the creditor may have changed from that at the time of CIRP commencement. Thus, it may be imperative to invite claims again at the liquidation stage. In case the claims are still not received, the liquidator may be empowered to rely upon the claims received at CIRP stage.

25. Role of the creditors during the liquidation process-

The CoC in liquidation may take all decisions by a simple majority of fifty-one per cent or more of the voting share.ess- CoC should supervise and support the liquidator’s functioning

Proposal: Currently, the role of the creditors at the stage of liquidation is limited to advising and assisting the Liquidator. The law mandates that the Liquidator shall run and take all commercial decisions related to the assets of the Corporate Debtor. However, noting the importance of commercial wisdom required at the stage of liquidation, it is being proposed that the CoC should supervise and support the liquidator’s functioning and shall also take commercial decisions and oversee the conduct of the proceedings.

Our Views: .The move may be avoided as at the stage of liquidation the interests of different classes of creditors are distinct and diverse from one another. In such a situation, it will really be a challenging task to come to a consensus with regards to a scheme for the manner and distribution of the receipts of the assets of the CD. The scenario may result in a deadlock where nothing substantial is achieved in terms of result.  Further, globally, the role of the creditors’ at the stage of liquidation has largely been limited to assisting and advising the Liquidator/Administrator. Please refer to our detailed comments on role of SCC/creditors in liquidation process here – https://vinodkothari.com/2022/07/comments-on-discussion-paper-on-streamlining-the-liquidation-process/

26. Replacement of the liquidator-

Proposal: As per section 34 of the Code, the RP appointed during the CIRP automatically continues as a liquidator during the liquidation process except where a change is recommended by IBBI or if the RP fails to perform its duties related to the examination of the resolution plan. However, pursuant to an amendment notification dated 16th September, 2022, the Stakeholders’ Committee was empowered to replace the Liquidator with ≥ 66% votes.

It is being considered that the Code may be amended to enable the CoC to  seek replacement of the RP conducting the CIRP from becoming the liquidator by  a vote of at least sixty-six per cent of voting shares. Further, the Code should be amended to empower it to replace the liquidator at any time during the process by a vote of not less than sixty-six per cent of voting shares.

Our View: Reasons for such removal can only be some material irregularity in terms of the provisions of the Code, and the same shall only be through an order of AA. Additionally, it is important to note that as of now, there is no provision enabling the IPs to resign from the process.

27. Stay on the continuation of proceedings during the liquidation process

Proposal: Section 33 (5) of the Code bars the institution of suits or legal proceedings by or against the CD without the leave of the AA during the liquidation process. However, it does not bar the continuation of any pending suit or legal proceeding once the moratorium imposed during the CIRP is terminated.

It is being considered that section 33 (5) be amended to prohibit the continuation of the suit or other legal proceedings during the liquidation process, apart from proceedings under section 52. The leave of the AA should also be required for continuing any suit or other legal proceeding by or against a CD undergoing liquidation.

The Proposal further adds that the CD would be allowed to go for dissolution without satisfying different civil claims raised against it in different forums.

Our Views: This point we had already raised at several occasions before. Unlike clause (a) of sub-section (1) of section 14, sub-section (5) of section 33 does not include the word ‘continued’, which apparently implies that suits or proceedings that were instituted prior to the insolvency commencement date may be continued during the liquidation proceedings. However, the Notes to Clauses of the Bill stated that, “The liquidation order shall result in a moratorium on the initiation or continuation of any suit or legal proceeding by or against the corporate debtor.” 

In fact, sec. 446 of the Companies Act, 1956 put a stay not only on institution of suit or other legal proceeding, but also on proceeding with the same, if such a proceeding is pending at the date of winding-up order. Similar position is there under sec. 279 of the Companies Act, 2013. Thus, in our view, absence of the word ‘continued’ is merely a drafting glitch – since allowing the continuation of pending suits or proceedings will hamper smooth conduct of liquidation proceedings.

Hence, the proposed amendment would remove this drafting glitch and is thus, welcome.

28. Realisation of security interest by the Secured Creditor

Proposal: In practice, it is observed that despite a timeline being specified in the regulations, the secured creditors do not inform the liquidator about their decision to relinquish or realize their security interests. The same caused long delays in the liquidation procedure.

Thus, it is being considered that the Code may restrict the secured creditor’s right to either realize the security interest or relinquish it within a stipulated period. Further, in cases where the secured creditors do not convey their decision to the liquidator within this period, they shall be deemed to have relinquished the security.

Our View: At present, reg. 21A talks about such presumption where, if the secured creditor does not intimate his decision to realise or relinquish the security interest within 30 days, or fails to realise the security interest within 180 days, or fails to make contributions within 90 days, the asset is presumed to be a part of the liquidation estate. Such certainty is needed in order to conduct the liquidation process. The move is appreciated and merely codifies the law available in the regulations.

29. Right of the Secured Creditors to Relinquish/ Realise secured asset in cases of Pari-Passu Charge

Proposal: In instances where multiple secured creditors have a pari-passu charge over an asset of the CD, some creditors may decide not to relinquish the security interest, while the  remaining secured creditors may favor such relinquishment. The indecisiveness between different classes of creditors causes delays in the liquidation procedure as the Liquidator is unable to sell the encumbered asset.

Thus, it is being considered that the Code may be amended to provide a presumption that all assets owned by the CD shall form part of the liquidation estate unless all  secured creditors holding pari passu charge over the secured assets of the CD  declare to realize their security interest outside the liquidation process.

Our View: The proposal indicates that even if one secured creditor decides to relinquish the security interest, and others intend to realise, the asset will be deemed to have relinquished. While there has to be a mechanism and explicit provision to provide for such scenarios where multiple creditors have pari passu rights over the same asset or same set of assets, it would be more appropriate and pragmatic to base this decision on the rule of majority. In other words, it would be very impractical for these creditors (who may have pari-passu rights with different proportions of debt in the total debt) to come to a unanimous decision, and thus an arrangement which would allow the majority to drive the process would be more logical and fair. For instance, this arrangement has been kept at 60% of the creditors’ agreeing together to exercise rights under the SARFAESI Act. It is also desired that laws related to the enforcement of security should have some parity and uniformity for smooth implementation and functioning in the credit ecosystem.

In this regard, there have been rulings before the Hon’ble NCLAT. For instance,  in Srikanth Dwarakanth Liquidator of Surana Power Limited vs. BHEL, it was held that if the secured creditors having 60% of the value in the secured debt decide to relinquish or realize the security interest, such decision shall be binding on the other pari-passu charge holders

In our view, the 60% rule should also be relevant for the purpose of IBC. If 60% of the secured creditors (in value) decide to realise, the asset shall go away from the liquidation estate. If the liquidator does not receive an intimation from 60% of the secured creditors (in value) within 30 days of the liquidation commencement date, the asset shall be presumed to be a part of the liquidation estate.

Clarity must also be provided with respect to creditors holding exclusive/senior security interest. In these cases, the decision of the secured creditor holding exclusive/senior security interest shall only be relevant.

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^[1] Company Appeal (AT) (Insolvency) No. 1351 of 2019