“Separate the process of approval of resolution plan and distribution of proceeds”
In order to avoid wastage of time due to objections about the distribution of proceeds raised when the resolution plan is pending approval before the NCLT, the insolvency regulator has proposed segregation of the concept of the resolution plan from the manner of distribution of proceeds received from the Successful Resolution Applicant (SRA).
Section 30(2) provides for two types of requirements for approval of the resolution plan by the NCLT — the manner of distribution and the minimum entitlement for the operational creditors and dissenting financial creditors, and other implementation-related requirements.
The insolvency regulator says that several objections regarding the distribution of proceeds are raised when the resolution plan is pending approval before the NCLT. “Since this requirement is a precondition for a plan’s approval, the process cannot move forward, or the successful resolution applicant cannot take over the CD’s management unless these disputes are settled. As a result, a substantial amount of time is wasted in these proceedings, which results in value deterioration. The time lag often makes the negotiation between the CoC and the SRAs infructuous,” says the regulator while arguing in favour of segregating the approval of resolution plan and the manner of distribution of the proceeds.
The proposal has been put forward in a consultation paper suggesting an overhaul of the Insolvency and Bankruptcy Code (IBC).
The consultation paper further says that resolution plan approved by the CoC will be required to comply with implementation-related requirements. It will contain provisions related to the inflow of funds to the corporate debtor or any other measures required for reorganising the corporate debtor. A scheme of distribution will be separately prepared to distribute the funds offered under the resolution plans.
Whenever finalised and approved by the CoC, the resolution plan(s) or the scheme of distribution, as the case may be, shall be placed before the NCLT for its approval. Further, as and when the NCLT receives the resolution plan(s) or the scheme of distribution, as the case may be, it should confirm whether they comply with the respective mandatory requirements and approve or reject them accordingly.
It has also been proposed that the Code may be amended to statutorily provide an equitable scheme of distribution of proceeds received pursuant to a resolution plan(s) through a separate waterfall mechanism in the CIRP.
As per this scheme, creditors will receive proceeds up to the CD’s liquidation value for their claims in the order of priority provided in Section 53.
Any surplus over such liquidation value will be distributed between all creditors in the ratio of their unsatisfied claims, proposes the consultation paper. Finally, any remaining amount or further surplus would be distributed to the shareholders and partners of the corporate debtor, as the case may be. It is expected that this will make the distribution process fairer and more equitable for all the stakeholders.
The consultation paper also suggests that the CoC may be mandated to transparently consider competing plans through an appropriately designed challenge mechanism. This, it says, avoid judicial delays due to several stakeholders challenging the resolution plans after its approval.
It has also been proposed to amend the law to clarify that the NCLT can send the resolution plan back to the CoC for curing defects. This is due to the fact that when a resolution plan approved by the CoC is submitted to the NCLT, there may be instances where it contains certain curable defects, which the CoC can cure.
