Insolvency panel for curb on revision of resolution plans, code of conduct for CoC

In order to address the issue of delays in Corporate Insolvency Resolution Plan (CIRP) and remove inefficiencies in the process, the Insolvency Law Committee has come up key recommendations in a report that has been submitted with the government. The key recommendations include curbs in revision of resolution plans, timely approval and rejection of resolution plans by NCLT and code of conduct for committee of creditors.

The key recommendations in this report are as follows:

• Mandating reliance on information utilities (IUs) for establishing default: With the development of IU infrastructure, the availability and acceptability of IU data has increased. Reliance on IU records has the potential of expediting the process of proving default, and may thus, avoid delays in admission of CIRP applications. Therefore, the Committee has recommended that certain financial creditors should be mandated to submit IU records with their CIRP application. The Adjudicating Authority (AA) should not seek any other documentation for proving default when IU records are submitted by the applicant. A similar mandate may be extended to operational creditors in due course of time.
• Continuation of proceedings for avoidable transactions and improper trading after CIRP: It has been observed that there is lack of clarity on whether proceedings for avoidable transactions and improper trading can continue after the completion of a CIRP. The Committee discussed that continuation of such proceedings is permitted by Section 26 of the Code and has recommended that a clarificatory amendment may be made to this provision to avoid any doubts in this regard. Further, suitable amendments may be made to the Code to ensure that the resolution plan provides sufficient clarity for the smooth conduct of proceedings 6 for avoidable transactions or improper trading. This will ensure that there is clarity amongst stakeholders on the manner in which such proceedings will continue after the approval of the resolution plan.
• Change in threshold date for look-back period: The threshold date for the look-back period of avoidable transactions should be altered to cast a wider net for catching such transactions. Consequently, the threshold date should be changed to the date of the filing of application for initiation of CIRP instead of the date of commencement. Further, transactions from the date of filing until the date of commencement should also be included in the look-back period. This will not only help increase the scope of avoidable transactions but will also discourage any perverse incentives for corporate debtors to delay the admission of CIRP applications.
• Curbing submission of unsolicited resolution plans and revisions of resolution plans: It has been observed that there are divergent practices regarding the timeline and manner of submission of resolution plans. Although there are stage-wise timelines provided in the regulations, resolution plans are received by the resolution professional after the stipulated deadlines. In some cases, revisions are made to submitted resolution plans in an attempt to outbid other potential resolution applicants. Such practices lead to divergent practices leading to inconsistencies, delays, and lack of procedural sanctity. Therefore, the Committee has recommended that a mechanism for reviewing late submissions of plans and unsolicited revisions to plans should be laid down in the regulations. Pursuant to the recommendations of the Committee in this regard, some amendments have already been carried out in the CIRP regulations.
• Timeline for approval or rejection of resolution plan: Delays have been observed in the disposal of resolutions plans submitted to the AA. Such delays are often caused due to a high number of objections to the proposed resolution plan, or due to a high degree of pendency of cases. Nevertheless, delays at the stage of disposal of the resolution plan are value destructive and discourage prospective resolution applicants from submitting plans. Therefore, the Committee has recommended that AA should dispose the resolution plan within 30 days of receiving it. The AA should record reasons in writing if it fails to dispose the plan within this timeline.
• Standard of conduct of the Committee of Creditors (CoC): The CoC has been entrusted with wide powers under the Code. It is tasked with making key decisions during the CIRP, including the manner of resolving the corporate debtor’s distress. Thus, improper conduct by members of the CoC impacts the life of the corporate debtor, and consequently its stakeholders. Given this pivotal role of the CoC, the Committee has recommended that the IBBI should issue guidelines that provide 7 the standard of conduct for members of the CoC. This may be in the form of guidance that provides a normative framework to members of the CoC about the manner of conducting themselves in processes under the Code.
• Stakeholders Consultation Committee (SCC): The SCC may play a pivotal role in the liquidation process by giving valuable commercial insights and maintaining oversight over the functioning of the liquidator. Therefore, the Committee has recommended that the liquidator must mandatorily consult the SCC. Accordingly, Section 35(2) of the Code and regulations made thereunder may be suitably amended. Pursuant to the recommendations of the Committee, amendments requiring such mandatory consultation with the SCC have already been made in the regulations.
• Secured Creditor’s Contribution: Secured creditors are permitted to step out of the liquidation process by choosing to realise their security interest outside instead of relinquishing it. The Code provides that secured creditors opting to realise their security interest outside the liquidation process are liable to contribute towards CIRP costs. The Committee has recommended that such secured creditors should also be required to contribute towards workmen’s dues in the same manner as they would have if they had relinquished their security interest. Workmen are key stakeholders of the corporate debtor and form the backbone of efforts to preserve the business of the corporate debtor, both before and during insolvency proceedings. Thus, contributions made by secured creditors towards their dues should be explicitly provided in the Code by amending Section 52. Further, when a secured creditor steps outside the liquidation process, he should also be liable to pay the liquidator for any expenses incurred by him for the preservation and protection of its security interest. If a secured creditor fails to make the required contributions, its security interest should be deemed to have been relinquished and become part of the liquidation estate.
• Voluntary Liquidation Process: There are varying practices on whether, and on what basis, a voluntary liquidation process can be terminated before the passing of a dissolution order. The Committee has recommended that such termination should be permitted since the process is meant for solvent entities whose business prospects may have changed since the commencement of the process. The Committee has recommended a simple mechanism for terminating a voluntary liquidation process which is akin to the mechanism for commencement of the process. Suitable amendments should be made to the Code to lay down this mechanism so as to ensure that there is consistent practice on termination of voluntary liquidation processes.
• Operationalisation of Insolvency and Bankruptcy Fund (IBC Fund): The Committee noted that the current design of the IBC Fund does not incentivise contributions to it and provides very limited ways of utilising the amounts contributed. Firstly, contribution to the Fund is voluntary and may be made by the Central Government in the form of grants and by any person who voluntarily wants to make such contribution. The Committee discussed that incentives may need to be built or mandates may be required for contributions to the Fund, as it may not be feasible to expect voluntary contributions otherwise. Secondly, the purposes for which the IBC Fund will be utilised are limited. Section 224(3) allows persons who have contributed to the Fund to withdraw it, to the extent of their contribution. Suitable amendments may be made to Section 224 to allow the Central Government to prescribe a detailed framework for contribution to and utilization of the IBC Fund

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