Rethinking the Fast-Track Insolvency Resolution Process
The Insolvency and Bankruptcy Board of India (IBBI) has proposed changes in the Fast-Track Corporate Insolvency Resolution Process (FIRP) in order to provide an opportunity for the financial creditors to drive the insolvency resolution process for a corporate debtor outside of the judicial process while retaining some involvement of the Adjudicating Authority to improve the legal certainty of the final outcome.
In a consultation paper floated by the insolvency regulator, it has been suggested that the Fast-Track Corporate Insolvency Resolution Process may be of particular use in cases where the financial creditor have taken direct or indirect control over the corporate debtor, allowing them to initiate the process with ease.
It has, therefore, suggested that the provisions dealing with Fast-Track Corporate Insolvency Resolution Process may be amended to provide that unrelated FCs of a CD may select and approve a resolution plan through an informal out-of-court process and involve the AA only for its final approval (or a moratorium, if needed). Insolvency resolution through this procedure will be available for CDs with such asset size as notified by the Central Government.
To prevent abuse of the Process, the following checks and balances can be included:
a) The application for approval of the resolution plan under this process will be made after obtaining the approval of sixty-six per cent of the FCs not being related parties of the CD. This is identical to the voting threshold required for approving a resolution plan during the CIRP.
b) The FCs shall be responsible for overseeing the conduct of the process before an application is filed, and they will be required to appoint an IP to facilitate this. Further, IBBI will specify a detailed procedure to be complied with before making an application, ensuring that the out-of-court process retains the core elements of the CIRP. For instance, at the pre-filing stage, she will be required to invite and collate claims against the CD through a public announcement, issue an invitation calling for resolution plans, and ensure that the resolution applicant complies with section 29A.
c) The resolution plan submitted to the AA under this process shall comply with all the mandatory requirements and safeguards stipulated for the resolution plan approved during the CIRP. Further, before admitting an application for approval of such plans, the AA must be satisfied that all the procedural preconditions (to be laid down in the Code and regulations) are fulfilled and that the plan complies with all the mandatory requirements.
D.To protect and preserve the assets of the CD during the pendency of this process and to avoid any recovery actions or syphoning off of assets, the applicant shall have the option to approach the AA to seek a moratorium (with the approval of a requisite majority of unrelated FCs). The scope of the moratorium shall be similar to the one provided during the CIRP under section 14 (1).
Expanding the applicability of the Pre-packaged Insolvency Resolution framework
The consultation paper also proposes that section 54A be amended to provide that the Pre-packaged Insolvency Resolution framework should apply to prescribed categories of CDs in addition to the MSMEs
The Pre-packaged Insolvency Resolution framework may involve a diverse range of FCs who will be required to approve its initiation at the pre-commencement stage by confirming the proposed RP under section 54A (2) (e). Thus, to facilitate quicker and more efficient decision-making at this stage, the 66% threshold for unrelated FCs may be lowered to 51%. Similarly, under section 54A (3), the 66% per cent threshold for unrelated FCs may be replaced by an enabling provision for the IBBI to specify the appropriate threshold, not being less than 51% of the unrelated FCs, for approving the filing of an application.
In practice, it is observed that the MSME CDs face challenges in furnishing a declaration regarding avoidance transactions or improper trading under section 54C (3) (c). Accordingly, it is being considered to omit clause (c) of sub-section (3) of section 54C.
