Summary of changes proposed in insolvency laws

To strengthen the functioning of the IBC, changes to the Code are being considered in relation to the admission of Corporate Insolvency Resolution Process (CIRP) applications, streamlining the insolvency resolution process, recasting the liquidation process, and the role of service providers under the Code.

Here is the summary of changes under consideration compiled by Satyam Poddar, Founder, S Gupta & Partners.

1.Development of a common E-Platform for Case Management System; Legal Process Streamlining; Document Management System; IP & Stakeholders Communication System. Regulators and Adjudicating Authority (AA) may also take reference of the said platform.

2. Amendment in Section 215 of the IBC; Operational Creditors (OCs) also be required to file information about debt and default to Information Utility (IU) similar to Financial Creditors (FCs). The information at IU shall be considered authenticated if the Corporate Debtor (CD) does or do not respond with stipulated timeline. In reference to Section 7 and 9 applications; the AA will only rely on the records of IU as conclusive evidence to determine occurrence of default.

3. In Section 7 petition; the AA has to admit petition on determination of debt and default only (and nothing more). [With this change; the position settled by the Hon’ble Supreme Court, in the matter of Vidarbha Industries Power Limited v. Axis Bank Limited, (Civil Appeal No. 4633 of 2021), will get nullified.]

A clarificatory amendment is also proposed for applicability of timeline of 14 days provided in Section 7 of the Code.

4. Interim Resolution Professional (IRP), in Section 10 petition, should be appointed by the AA and deletion of right of the CD propose the name of IRP in the petition to maintain Independence of the professional appointed.

5. Amendment in Section 235 of the Code; to empower the AA to impose penalty in response of the application by the IBBI or its authorised person in case of any non-compliance of the provisions of the Code/Rules/Regulations. Also, the AA may impose penalty if it believes that a person filed frivolous or vexatious applications. Such penalty should not be less than INR 1 Lakh per day, which may extent to 3 times the loss caused or unlawful gain, whichever is higher.

The conduct of promoters along with gravity of the contraventions committed by such promoters shall be considered by the AA when such promoters come as Resolution Applicant or place Resolution Plan in any CIRP. The necessary amendment in Section 29A is proposed to bar such promoters.

6.  Amendment in the Fast Track Insolvency Resolution Process (FIRP) to allow Unrelated FCs to select and approve the resolution plan through an informal out-of-court process and involvement of the AA for final approval (or a moratorium, if needed, with the approval of requisite majority of unrelated FCs). The FCs shall be responsible to oversee the process and approval of 66% of the FCs not being related party will be required. Before admitting the application of approval of the resolution plan; the AA must satisfy about the compliance of procedure preconditions (to be laid down in the Code/Regulations) and compliance of mandatory requirements in plans. The insolvency resolution through this procedure will be available for CDs with such asset size as notified by the Central Government.

7. Applicability of Pre-Packaged Insolvency Resolution Process (PPIRP) to be extended to prescribed categories of the CDs in addition to MSME by amending Section 54A of the Code.

Other modifications/relaxation related to PPIRP:

•  Reduction in approval threshold from 66% of FCs not being related to 51% at the stage of name of Insolvency Professional (IP) to be appointed as Resolution Professional (RP) and also at the stage of filing of petition for initiation the PPIRP;

(b)  Omission of the provisions relating to requirement of a declaration by the CD regarding the existence of avoidance transactions. (Considering that CoC can terminate the PPIRP at any stage when it come across any such transaction);

(c)  Omission of the provisions relating to change in management u/s 54J or conversion to CIRP or Liquidation u/s 54O or 54N (4). (Considering that CoC can terminate the PPIRP at any stage).

8.  The AA, at its discretion, shall admit CIRP w.r.t. one or more real estate projects of the CD (promoter of real estate project) which are in default.

The provisions of the Code/Rules/Regulations will apply only to such project(s) which is/are recognised as distinct from the larger entity.

The amendment in Section 28 is proposed to enable RP to transfer the ownership and possession of a plot/apartment/building being completed unit of real estate project to allottees with the consent of the Committee of Creditors (CoC) during the CIRP.

9. Changes related to the Resolution Plan Document

(a)  The CoC may approve one or more resolution plans considering the asset of the CD individually or collectively. At least one plan has ought to provide resolution of the CD as going concern with/without Corporate Restructuring. Once the resolution plan to resolve the CD as going concern is approved by the CoC, the same should be put for approval of the AA and the implementation of such plan should be continued pending the approval of the other resolution plans. The CIRP of the CD will end once all the CoC approved resolution plan get approval from the AA.

(b) Segregation of the Resolution Plan Document and Scheme of Distribution Document with separate approval from the CoC followed by the approval from the AA.

The Scheme of Distribution should provide distribution of proceeds among creditors as per Waterfall Mechanism provided in Section 53 and any surplus after such distribution among the creditors in the ratio of the unsatisfied claims. Any     surplus,         thereafter,    be       distributed    to shareholder/partners of the CD.

(c) CoC may be mandated to transparently consider competing plans through an appropriately designed challenge mechanism to avoid delay and value destruction due to challenge the approved resolution plan by the stakeholders.

(d) Constitution of the Monitoring Committee for monitoring and supervision of implementation of the resolution plan post approval from the AA to be considered in Section 30.

(e) Clarificatory amendment in Section 31 to include provision that the AA can send back the resolution plan to the CoC to deal curable defects.

10. The AA, at its discretion, can reinstate the CIRP in case-

(a) Liquidator continues CD’s business as going concern and the CoC determined that CD can be revived;

(b) 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.

11. For efficient resolution of the CD; the asset of the Corporate/Personal Guarantors can be included in the general asset pool available for CIRP in case assets of the CD are intermingled with assets of such guarantors i.e., Land belongs to guarantors and Building/Plant/Machineries belong to the CD.

Also, in case if secured creditors have taken possession of the such intermingled assets of the guarantors under the SARFAESI Act, 2002; an option to sell such assets through a special window created under the CIRP process duly protecting rights of guarantors under the SARFAESI.

12. There may be a common AA and IP for the CD and its related parties to conduct CIRP in a consolidated manner. The Code may be amended to include a detailed framework for the domestic group insolvency procedure. In this regard, the report of the Cross Border Insolvency Rules/Regulations Committee-II (CBIRC-II) under the chairpersonship of Dr KP Krishnan may be referred at MCA Portal.

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

14. All debts owed to the Central/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. Further, it will be clarified that only where the security interest is created pursuant to a transaction of the Central/State Government with CD, the Government in question will continue to be treated as a secured creditor in the order of priority. [With this change; the position settled by the Hon’ble Supreme Court, in the matter of State Tax Officer v. Rainbow Papers Limited (Civil Appeal No. 1661 of 2020), will get nullified.]

15. Amendment in Section 29 to include an estimation of valuation of the CD’ asset in the Information Memorandum (IM) document.

16.  An explanation, under section 31, may be provided to make it abundantly clear that after approval of the resolution plan, unless the CD fails to fulfil any obligations arising from any arrangement with respect to services, licences, permits, registrations, quotas, concessions, clearances, or similar grants or rights; the Central Government, State Government, local authority, or any statutory authority with whom such an arrangement subsists, shall continue to honour the arrangement during its term.

17. A clarificatory amendment to clear that post-approval of the resolution plan, no proceedings may be 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. Since the resolution plan only concerns the CD, such a clarification is not intended to extinguish any liabilities of CD’s promoters.

18. A clarificatory amendment to Section 5 (28) that ‘voting share’ will be computed as the financial debt owed to the concerned FC in relation to the financial debt owed to only the members of the CoC who are eligible to vote as per section 21.

Further, the voting threshold for major decisions should be revised to two- third of the CoC members present and voting in a meeting. While such decisions; it should be ensured the voting share of the members of the CoC who approve the decision should constitute at least 51% or more of the total voting share of the CoC.

19. To incentivise the interim finance providers, they may be allowed to participate in the meetings of the CoC as non-voting members to keep themselves informed about the proceedings under the Code.

20. Insertion of 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). [Similar to mechanism under Section 241(2) of the Companies Act, 2013]

21. Insertion of new provision in the Code to exempt a class or certain classes of debtors from the applicability of the provisions of the Act or apply its provisions with certain exceptions, modifications and adaptations as may be specified in the notification, subject to procedural safeguards provided therein. [Similar to Section 462 of the Companies Act, 2013]

22. In case of Individual Insolvency Resolution Process (IIRP) of Personal Guarantors (PGs) to CD:

(a) Amendment to remove applicability of Interim Moratorium u/s 96 in the IIRP case of PGs to CD; and also, to propose common RP for concerned CD and PGs to CD concurrently undergoing in insolvency processes.

(b) Amendment to Section 106 of the Code to provide that the meeting of creditors is compulsory for cases involving PGs to CDs.

(c) Amendment to Section 106 of the Code to provide submission of a report by the RP to intimate the AA about non-submission of repayment plan in the stipulated period. The AA shall terminate IIRP and thereafter, Section 106 and 121 may provide the rights to creditors to file bankruptcy of the debtor.

(d) Insertion of new provision to address fraudulent transactions by the insolvent individuals in a manner similar to CIRP.

(e) Section 101 and 124 may be amended to provide that avoidance action proceedings pursuant to any CIRP may be exempted from the moratorium granted under the IIRP of a PG to a CD.

23. In case CoC believes that conducting Liquidation Process of the CD will not be feasible or beneficial to stakeholders; the AA, upon request of the CoC, should allow the dissolution of the CD without undergoing Liquidation Process if the AA thinks it is just and reasonable to do so. [Similar to provisions of the Winding Up Process under the Companies Act, 2013]

24. To avoid duplicate activities during CIRP and Liquidation Process; omission of Section 38 to 42 related to consolidation, verification, admission/rejection, determination of valuation and appeal against the decision of the liquidator w.r.t. claims during the Liquidation Process. Also, omission of duty of liquidator “to invite claims” under Section 35(1)(f). The duty of liquidator “to verify claims” under section 35(1)(a) will get replaced with “to maintain a list of creditors”.

With reference to the avoidable transactions; insertion of a new provision to empower liquidator to continue with avoidable proceeding filed during the CIRP and also to initiate fresh proceeding as and when the liquidator traces such transaction during the Liquidation Process.

25. The CoC should supervise and support the liquidator’s functioning. The composition of the CoC for the liquidation process should be modified to include a more broad-based representation of creditors in the manner specified by the IBBI. Further, the CoC in liquidation may take all decisions by a simple majority of 51% or more of the voting share.

26. Insertion of new provision to enable CoC to seek replacement of RP with another IP as liquidator; and replacement of liquidator during the liquidation process with a vote of not less than 66% of voting share.

27. Amendment in Section 33 (5) 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. Amendment to allow dissolution of the CD u/s 54 despite the pendency of any proceedings concerning a claim against the CD subject to appropriate arrangement by the liquidator for pursuing such proceedings and distribution from sale proceeds against the same in case of adverse order for the CD. Also, passing of the dissolution order shall not affect the continuation of avoidance proceedings, and the CoC shall determine how to pursue and distribute the proceeds from such proceedings.

28. The Code may restrict the secured creditor’s right to either realise the security interest or relinquish it within a stipulated period during the liquidation process. Also, it may be clarified that where secured creditors do not convey their decision to the liquidator within this period, they shall be deemed to have relinquished the security interest.

29. 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 realise their security interest outside the liquidation process. A similar approach may be followed in case of secured assets in which the creditors have an inter-se hierarchy of charges.

30. To improve Regulatory Process regarding Service Providers:

(a)       Similar to IPs; IBBI may be empowered to register and regulate class of valuers for rendering all valuation related services during the IBC processes.

(b)       Section 219 of the Code may be amended to enable IBBI to issue an SCN without inspection or investigation if sufficient material is available on record.

Also Read: CIRP can be reinstated during liquidation process if market conditions for corporate debtor improves