Amendment likely to clarify resolution does not extinguish liability of guarantors
The Insolvency and Bankruptcy Board of India (IBBI) has proposed several changes to streamline the corporate insolvency resolution process as well as remove ambiguities related to certain issues. The regulator has proposed to amend CIRP Regulations to clarify that the resolution plan submitted by the resolution applicant shall not extinguish the rights of the creditors to proceed against guarantors and enforce realization of guarantees governed through various guarantee agreements.
The proposal came after multiple orders of various judicial authorities delving upon the diverse facets of the issue regarding the treatment of guarantees in a resolution plan. Many of these orders on guarantors liability are of contradictory nature and therefore, the insolvency regulator felt the need to remove any ambiguities in this regard.
The regulator has decided to follow the approach of the Supreme Court in the matter of Lalit Kumar Jain v. Union of India, wherein it was clarified that approval of a resolution plan of a CD does not automatically release its guarantors from their liability.
In yet another significant change proposed by the regulator, it has been decided that CIRP of corporate debtors having asset size up to Rs. 1000 crore and in CIRP of CDs classified as MSME, as a default position, the resolution professional will appoint only one registered valuer for providing the estimates of the fair value and the liquidation value. However, keeping in view the complexities so involved, if CoC so decides to have two valuers, it has to record the reasons for the same before RP takes steps for such appointments.
This change was prompted by the fact the CIRPs of companies up to a certain asset size and MSMEs in particular are very cost sensitive owing to their size. Therefore, any measure to reduce to the CIRP cost and delay in the process will be certainly helpful in the resolution of those CDs.
Provision of two or three valuation estimates escalates the CIRP cost substantially and may contribute to delay in the process.
In another change, in order to streamline the process and remove ambiguities around the present framework of appointment of valuers for the purpose of valuation of the corporate and to align the regulations with the valuation rules, it is proposed that the CIRP Regulations may be amended to specify that the resolution professional shall assign for carrying out the valuations of the CD as a whole to the registered valuer (RV). The RV may conduct the valuation as per rule 8(2) of the Valuation Rules taking inputs for other asset classes or get the valuation for an asset class conducted from another registered valuer, if required.
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