What Are India’s Key Proposed Changes To Overhaul Bankruptcy Law?

India plans to make changes to the Insolvency and Bankruptcy Code (IBC) in order to strengthen the corporate insolvency resolution process (CIRP) and liquidation frameworks.

The IBC – India’s first comprehensive law to address the insolvency of corporate persons and individuals – was enacted in 2016 and the law has already undergone several amendments to improve the insolvency resolution process.

To further strengthen the functioning of the IBC, the government is considering several changes to the code and has sought public comments by 7 February, Rajan Jain, deputy secretary (IBC) at Ministry of Corporate Affairs, said in a notice.

The proposed changes are related to the admission of CIRP applications, streamlining the insolvency resolution process, recasting the liquidation process, and the role of service providers under the code.

Following are some of the key proposals:

STREAMLINING IBC ECOSYSTEM TECHNOLOGY

• Developing an integrated electronic platform to handle several processes under the code with minimum human interface.

• The e-platform may provide for a case management system, automated processes to file applications with the adjudicating authorities (AAs), delivery of notices, enabling interaction of insolvency professionals (IPs) with stakeholders, and storage of records of corporate debtors undergoing the process.

• The e-platform may also allow regulators and AAs to exercise better oversight over their respective domains of functioning through the consolidated information.

ADMISSION OF CIRP APPLICATIONS

• Increasing reliance on record submitted with the information utilities (IUs) during the admission process

• Before making an application to initiate the CIRP, the relevant information regarding the occurrence of a default or dispute may be ascertained at the IUs by the financial creditors (FCs), operational creditors (OCs) and corporate debtors (CDs). The stored evidence can be relied on for speedy default verification and swift initiation of the CIRP.

Proposed Changes:

• To amend Section 215 so that operational creditors must submit the relevant financial information with the IUs in advance, if they plan to apply for initiating the CIRP against a CD.

• To amend Section 215 to provide a reasonable opportunity to the CD or the debtor to respond to the financial information submitted concerning them. To prevent recalcitrant debtors from causing delays at this stage, the financial information will be considered authenticated if the CD or the debtor does not respond within a stipulated period.

• AA will only rely on the record of default available with the IUs to determine if a default has taken place while considering an application filed under Section 7 and Section 9.

• The record of default available with the IUs will be conclusive proof about the occurrence of a default. However, AA may consider other evidence if such record is not available with the IU.

• To amend Section 7 to clarify that while considering an application for initiation of the CIRP by the financial creditors, the AA is only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements. If a default is established, it is mandatory for the AA to admit the application and initiate the CIRP.

• To amend Section 10 to delete the right of the CD to propose an interim resolution professional (IRP). The IRP should be appointed by the AA on the recommendation of the Insolvency and Bankruptcy Board of India (IBBI).

• To amend Section 235A to empower the AA to impose penalties on person for violations of the code. The proceedings related to this may be initiated on an application made by the IBBI or its authorized person.

• Section 65 provides a penalty against fraudulent or malicious initiation of admission proceedings, but no penalty is imposed on other proceedings filed before the AA. Therefore, the AA should also be empowered to impose a penalty where it believes that a person has filed frivolous or vexatious applications.

• The minimum penalty that the AA may impose should not be less than one lakh rupees per day ($1,227), which may extend to three times the loss caused or unlawful gain, whichever is higher.

• To amend Section 29A to empower the AA to bar promoters, who commit repeated or substantial contraventions, from being a resolution applicant and submitting a resolution plan in the CIRP of any CD. The AA, while exercising this power, will be required to consider the conduct of the promoter in the relevant CIRP and the gravity of the contraventions committed.

STREAMLINING INSOLVENCY RESOLUTION PROCESS

Fast-Track Corporate Insolvency Resolution Process

• To amend the provisions dealing with the Fast-Track Corporate Insolvency Resolution Process (FIRP) so 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.

Pre-packaged Insolvency Resolution Process

• To amend Section 54A to provide that the Pre-Packaged Insolvency Resolution Process (PPIRP) framework will apply to prescribed categories of CDs in addition to the micro, small & medium enterprises (MSMEs).

Insolvency Resolution In Real Estate Cases

• If default of a CD, who is the promoter of a real estate project, pertains to one or more of its real estate projects, the AA, at its discretion, should admit the case, but apply the CIRP provisions only with respect to such real estate projects, which have defaulted. Accordingly, such projects should be recognized as distinct from the larger entity for the limited purpose of resolution.

• The provisions of the code as they apply to the CIRP of a corporate person should, with necessary modifications, be made applicable to the CIRP of such real estate projects.

• To amend Section 28 to enable the resolution professional to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the committee of creditors (CoC).

CONSIDERATION & DISTRIBUTION OF PROCEEDS

Approval of multiple resolution plans in respect of the same CD

• To amend the code to enable that the CoC may approve that individual or collective assets of the CD may be resolved in one or more resolution plans.

• However, at least one of the plans ought to provide for insolvency resolution of the CD as a going concern, which may include provisions for its corporate restructuring and other mandatory requirements such as management of affairs of the CD after approval by the AA.

Separation of resolution plans and distribution of proceeds

• To amend the code to segregate the concept of the resolution plan from the manner of distribution of proceeds received from the successful resolution applicants. Whenever finalized and approved by the CoC, the resolution plans or the scheme of distribution, as the case may be, should be placed before the AA for its approval.

• To amend the code to statutorily provide an equitable scheme of distribution of proceeds received pursuant to a resolution plan through a separate waterfall mechanism in the CIRP.

• Under the separate waterfall mechanism, 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 rateably distributed between all creditors in the ratio of their unsatisfied claims. Finally, any remaining amount or further surplus would be distributed to the shareholders and partners of the corporate debtor, as the case may be.

Mandating use of challenge mechanism

• To mitigate delays and value destruction, the CoC must transparently consider competing plans through an appropriately designed challenge mechanism.

Monitoring implementation of resolution plan

• To amend Section 30 so that the CoC may provide for constitution of a monitoring committee for monitoring and supervising the implementation of the resolution plan after its approval by the AA.

AA to provide opportunity to cure defects in resolution plan

• To amend Section 31 to clarify that the AA can send the resolution plan back to the CoC for curing certain curable defects.

REINSTATING CIRP

• The code may enable reinstatement of the CIRP during the liquidation process, where the liquidator continues to carry on the CD’s business, and it is possible to revive the CD as determined by the CoC.

• If 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, it may be empowered to apply to the AA for such reinstatement.

INTERMINGLING ASSETS OF CD & ITS GUARANTORS

• To provide a mechanism under the code to include closely linked assets of the guarantor in the general pool of assets available for the CIRP for efficient resolution of the CD.

• To amend the code to provide that in a case where the secured creditor has taken possession of a secured asset of the guarantors of the CD under the SARFAESI Act 2002 that is linked to the CD’s assets, secured creditor may have the option to sell such assets through a special window created under the CIRP process.

Resolving Inter-Dependent Entities

• There may be a common AA and IP for the CD and its related parties. Also, the CoCs of two or more CDs may apply to the AA seeking cooperation and coordination of the CIRPs concerning the CDs.

Improving recoveries for operational creditors in liquidation

• All unsecured creditors (FCs, OCs and any government or authority) other than the workmen and employees should be treated equally for distribution under Section 53. The order of priority for the secured creditors, workmen and employees should be retained as stipulated under Section 53.

Treatment of security interests created by statutes

• All debts owed to central government and the state government, irrespective of whether they are secured creditors pursuant to a security interest created by a mere operation of statute, should be treated equally with other unsecured creditors.

• However, if the security interest is created pursuant to a transaction of the central government or a state government with CD, then the government in question will continue to be treated as a secured creditor in the order of priority.

Disclosure of valuation estimate of assets

• To amend Section 29 so that the information memorandum should contain an estimation of the valuation of CD’s assets.

• Protection of a resolution applicant post implementation of resolution plan concerning civil liabilities

• To amend the code to clarify 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 should stand extinguished.

Clarity on computation of voting share and treatment of abstention

• To amend Section 5 (28) to clarify that ‘voting share’ will be computed as the financial debt owed to the concerned FC related to the financial debt owed to only the members of the CoC who are eligible to vote as per Section 21.

• To revise the voting threshold for major decisions to two-thirds of the CoC members present and voting in a meeting. However, when such decisions are undertaken, it should be ensured that 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.

Incentivizing interim finance providers

• To allow interim finance providers to participate in the meetings of the CoC as non-voting members to keep themselves informed about the proceedings under the code.

Appointment of administrator by central government

• To insert an enabling provision in the code for the central government or any other authority 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.

Individual insolvency-related proposals

• To amend Section 96 to make it inapplicable to personal guarantors (PGs).

• To amend Section 97 to provide that for better coordination between the individual insolvency resolution process (IIRP) of a PG and the CIRP of a CD to whom the PG has extended a personal guarantee, who are concurrently undergoing insolvency resolution, a common RP may be appointed.

• To amend Section 106 to provide that the meeting of creditors is compulsory for cases involving PGs to CDs.

• To insert a new provision in the code to address fraudulent transactions by insolvent individuals in a manner consistent with similar provisions applicable to the CIRP.

RECASTING LIQUIDATION PROCESS

• To amend the code to enable the CoC to request the AA to dissolve the CD if it believes that conducting the liquidation process in such circumstances may not be feasible or beneficial for the stakeholders.

• If the CoC requests that the CD should be dissolved without undergoing a liquidation process, the AA should allow the dissolution of the CD in such cases where it thinks it is just and reasonable to do so.

Eliminating duplication of activities between the CIRP and Liquidation Process

• To amend the code to omit sections 38 to 42 and the requirement to invite fresh claims under section 35 (1) (j).

• Also, the duty to verify claims under section 35 (1) (a) should be substituted by the responsibility to maintain a list of creditors during the liquidation process. The IBBI should be empowered to specify the detailed procedure for this.

Role of the creditors during the liquidation process

• To ensure that the liquidator’s activities are monitored more effectively, the CoC should supervise and support the liquidator’s functioning.

• The CoC in liquidation may take all decisions by a simple majority of 51% or more of the voting share.

Replacement of liquidator

• To amend the code to enable the CoC to seek replacement of the RP conducting the CIRP from becoming the liquidator by a vote of at least 66% of voting shares.

• To amend the code to empower the CoC to replace the liquidator at any time during the process by a vote of not less than 66% of voting shares.

Stay on the continuation of proceedings during the liquidation process

• To amend 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.

ROLE OF SERVICE PROVIDERS AND OTHER STAKEHOLDERS

• IBBI may be empowered to register and regulate a special class of valuers for rendering all valuation-related services during the processes envisaged under the code.

• To amend Section 219 to enable IBBI to issue a show cause notice without inspection or investigation if sufficient material is available on record.

(Note: $1 = 81.4684 Indian rupees)