The Insolvency Law Committee (“ILC/Committee”) has submitted its 5th Report (“Report”) to the Hon’ble Union Minister of Finance and Corporate Affairs on May 20, 2022 (published on June 15, 2022). The Report provides recommendations in respect of the Corporate Insolvency Resolution Process (“CIRP”) and Liquidation Process.
The key recommendations in this Report and summary of discussion by the Committee is as follows: -
1. Mandating Reliance On Information Utilities (IUs) For Establishing Default:
1.1. As 14 (fourteen) days’ period for admitting/rejecting an application under CIRP is directory in nature, NCLT is not barred from admitting or rejecting an application after the requisite time-period. In practice, the adjudication of most CIRP applications takes a considerably longer time than fourteen days. It was observed that maximum delay is taking place at the stages of admission of CIRP and approval of resolution plan by the adjudicating authority. Hence reducing delay in admission is the most crucial aspect.
1.2. An application for initiating a CIRP under Sections 7, 9 and 10 depends largely on the evidence of default committed by a corporate debtor. One of the ways of proving the existence of a default is by submitting records registered with IUs in this regard.
1.3. The Committee noted that relying on IU authenticated records that indicate undisputed information of default would enable the NCLT to spend less time on verification of default and allow for quicker disposal of CIRP applications. Given that banks and financial institutions have developed the practice of submitting information to IUs, the Committee agreed that mandating such creditors to rely only on IU records to establish default may expedite disposal of their applications.
1.4. Therefore, the Committee recommended that
i) Financial creditors that are financial institutions, and such other financial creditors as may be prescribed by the Central Government, should be required to submit only IU authenticated records to establish default for the purposes of admission of a Section 7 application.
ii) Where such IU authenticated records are not available, and for all other financial creditors, current options of relying on different documents for establishing default may remain available.
iii) Suitable amendments to Section 7 may be made for this purpose.
iv) With further development of IU infrastructure in due course, it may be considered if operational creditors should be similarly mandated to rely on IU records for establishing default
(Refer paragraphs 2.10 and 2.11 of the Report)
2. Exemptions From The Scope Of The Moratorium:
2.1. Upon admission of an application under Sections 7, 9 or 10 of the Code, the Adjudicating Authority declares a moratorium for the purposes referred to in Section 14. Under Section 14(3)(a), the Central Government, in consultation with any financial sector regulator or any other authority, has the power to notify transactions that may be exempted from the scope of the moratorium provided in Section 14(1).
2.2. The Committee was called upon to consider whether certain transactions in respect of securities and related proceedings under securities law should be exempted under this provision by the Central Government.
2.3. The Committee recommended that the exemption under Section 14(3)(a) should be exercised only in exceptional circumstances, which may not hinder the smooth conduct of the CIRP and hence, should not be relaxed until found necessary from the implementation experience of the Code.
(Refer paragraph 2.15 of the Report)
3. Issues Related To Avoidable Transactions And Improper Trading:
Part A: Independence of proceedings
3.1. Committee noted that there is lack of clarity regarding certain aspects of proceedings for avoidance of transactions and improper trading [Sections 43-51, 66, and 67].
3.2. There is confusion regarding whether proceedings for avoidance of transactions and improper trading (“Proceedings”) can continue after approval of a resolution plan in CIRP as in a recent decision of the Delhi High Court in Venus Recruiters Private Limited vs. Union of India (W.P. (C) 8705/2019), wherein the Court inter alia opined that once the CIRP itself comes to an end, an application for avoidance of transactions cannot be adjudicated.
3.3. The Committee considered two hypothetical scenarios if proceedings are not allowed to continue after the conclusion of a CIRP,
i) Compulsory conclusion of Proceedings prior to approval of the resolution plan under Section 31: - This would inordinately delay the conclusion of CIRP proceedings, undermining the timely resolution of the corporate debtor. It is because not only the investigation and finding, but the adjudication of such transactions is also a lengthy process.
ii) Proceedings are considered infructuous upon approval of the resolution plan under Section 31:- Since investigation and adjudication of avoidable transactions are often time-consuming, this may allow corporate debtors an escape from reversal of suspicious pre-commencement transactions and permit them to gain undue benefit.
3.4. It was noted that Section 26 of the Code provides that filing of an avoidance application under Section 25(2)(j) by the resolution professional “shall not affect the proceedings of the corporate insolvency resolution process”. Therefore, an application for avoidable transactions is not restricted by the timelines provided for the CIRP under Section 12 of the Code.
3.5. The Committee recommended that to alleviate any doubts in this regard, the Committee decided that a clarificatory amendment may be made to Section 26 so that the completion of the CIRP proceedings do not affect the continuation of Proceedings. (Refer paragraph 2.23 of the Report)
Part B: Jurisdiction of the Adjudicating Authority
3.6. The Committee observed that Section 60 when read with Section 26 suggests that the NCLT has jurisdiction on matters related to insolvency proceedings of the corporate debtor and is not limited to a question of law but extends to disposal of proceedings. Hence, amendments to Section 60 are not required in this regard (Refer paragraph 2.25 of the Report)
Part C: Manner of conducting avoidance proceedings after conclusion of CIRP
3.7. The Committee has recommended that
i) The Code should be amended to mandate that the resolution plan should specify the manner of undertaking such Proceedings, if such proceedings are to be continued after approval of the plan. This includes specifying details such as the person who will continue to pursue such proceedings and the manner of payment of the costs of such proceedings.
ii) Moreover, the resolution plan should also include the manner of distribution of the recoveries made from the proceedings for avoidance of transactions or improper trading.
iii) The Adjudicating Authority should also be satisfied that the plan provides sufficient details of the manner of continuation of proceedings for avoidance and improper trading, after its approval.
(Refer paragraph 2.28 and 2.30 of the Report)
Part D: Threshold date for look-back period
3.8. In practice, the admission or rejection of an application takes longer than the 14-day time limit provided in the Code. Given this, the look-back period for avoidable transactions may not be able to capture a significant portion of transactions that occurred before the filing of a CIRP application. This may reduce the effectiveness of the provisions related to avoidance of transactions.
3.9. Further, it may also give corporate debtors a perverse incentive to delay admission of CIRP to reduce the scope of avoidable transactions. Thus, the Committee discussed that whether the threshold for the look-back period for avoidance of transactions under the Code should be modified.
3.10. The Committee decided that: -
i) The threshold date for the lookback period for avoidable transactions under the Code should be the date of the filing of application for initiation of CIRP i.e., the initiation date.
ii) Transactions from the initiation date until the insolvency commencement date should also be included in the look-back period.
iii) The Code may clarify that where multiple CIRP applications have been filed and admitted regarding the same corporate debtor, the date of filing of the first such application should be considered as the ‘initiation date’.
(Refer paragraph 2.34 of the Report)
4. Curbing Submission Of Unsolicited Resolution Plan And Revision Of Resolution Plans:
4.1. The Committee noted that, resolution plans are received by the resolution professional after the deadline stipulated in the EoI and the RFRP in some instances. Broadly, the Adjudicating Authority and the NCLAT deal with two types of situations in relation to delayed submission of resolution plans.
i) Where resolution plans are submitted after the stipulated deadline and the same are not considered by the resolution professional or the CoC.- In certain cases, tribunals have directed the resolution professional or the CoC to consider a resolution plan after the deadlines. Conversely, in some cases tribunals have upheld the sanctity of the timelines provided under the regulations.
ii) Where resolution plans are submitted after the stipulated deadline and the same are considered by the resolution professional or the CoC.- In few cases where a resolution plan submitted beyond the stipulated deadline was approved by the CoC, it was held that the tribunals are not vested with the jurisdiction to review commercial decisions of the CoC and the resolution plan was approved. However, it has also been held that the CoC in its commercial wisdom cannot permit an EoI submitted after the deadline.
4.2. Further, though CIRP Regulations do not give a right to the resolution applicants to unilaterally revise or improve resolution plans, tribunals have in some instances observed that revisions to plans submitted should be considered by the CoC if it is during the CIRP period and a plan has not yet been approved by the CoC.
4.3. Divergent judicial approaches regarding the submission or revision of plans after stipulated deadlines results in uncertainty in the process. Therefore, the Committee decided that the regulations should clearly lay down a mechanism for reviewing late submissions of (or revisions to) resolution plans. Further, suitable amendments should be made in the Code to ensure that the procedure provided in the regulations has due sanctity. (Refer paragraph 2.45 of the Report)
5. Timeline For Approval Or Rejection Of Resolution Plan:
5.1. This last step approval of a resolution plan by the Adjudicating Authority becomes a significant hurdle to the resolution and rehabilitation of the corporate debtor. There are significant delays in the approval or rejection of resolution plans by the NCLT.
5.2. Such delays can be partly attributed to the applications filed by disgruntled resolution applicants or other stakeholders questioning the distributions contemplated under a resolution plan.
5.3. The Committee considered judgment of Supreme Court in the case Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, [(2022) 2 SCC 401].
5.4. The Committee recommended that amendments should be made to Section 31 of the Code to provide that the Adjudicating Authority has to approve or reject a resolution plan within 30 days of receiving it. This 30- day time-period shall be subject to the overall time-period specified for the completion of the CIRP under Section 12. Further, where the Adjudicating Authority has not passed an order approving or rejecting the resolution plan within such 30-day time-period, it may be required to record reasons in writing for the same. (Refer paragraph 2.51 of the Report)
6. Conflicts Of Interest With Professionals:
6.1. The Code provides for the interim resolution professional/resolution professional to seek the assistance of various professionals in the performance of their duties and confers on them the authority to appoint such professionals as necessary. The Code also provides for the IBBI to specify the manner of their appointment by way of regulations.
6.2. There have been instances where the NCLTs have raised concerns about the large number of people engaged by the resolution professional for providing various services, outsourcing of responsibilities to them, and the exorbitant costs incurred towards fees of the professionals.
6.3. The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, which regulate insolvency professionals provides for a Code of Conduct in the First Schedule. The Code of Conduct also mandates the insolvency professional to disclose any conflict of interests and particulars regarding such conflict to the stakeholders, at any time during the assignment.
6.4. Regulation 27(3) also provides that the appointment of registered valuers and other professionals is to be done “on an arm’s length basis following an objective and transparent process” and prohibits certain categories of persons from being engaged as professionals.
Given the above, the Committee agreed that further disclosures of conflicts may be provided in subordinate legislation, if required, and that amendments to the IBC for this purpose may not be necessary. (Refer paragraph 2.57 of the Report)
7. Standard Of Conduct For The CoC:
7.1. It was brought to the notice of the Committee that there have been a few instances of improper conduct by members of CoCs that have raised concerns amongst stakeholders.
7.2. In some instances, the representatives sent by members of the CoC are neither adequately apprised of their role, nor adequately empowered to take decisions. This causes delay and allows depletion of value which goes against two crucial objectives of the Code, i.e., timely resolution and maximization of value available for stakeholders.
7.3. It is also pertinent to note that presently, the conduct and decision making of the CoC is not subject to any regulations, instructions, guidelines etc. of the IBBI.
7.4. Therefore, the Committee agreed that it would be suitable for the IBBI to issue guidelines providing the standard of conduct of the CoC while acting under the provisions governing the corporate insolvency resolution process, pre-packaged insolvency resolution process and fast track insolvency resolution process. This may be in the form of guidance that provides a normative framework for conducting these processes. In order to empower the IBBI to issue such guidelines, the Committee recommended that appropriate amendments may be made to Section 196 of the Code. (Refer paragraph 2.62 of the Report)
8. Stakeholders Consultation Committee (SCC):
8.1. The Code currently authorizes the liquidator to consult any of the stakeholders who are entitled to a distribution of proceeds and such consultations are not binding on the liquidator.81 Further, Section 37(2) requires the liquidator to provide financial information to any creditor who requests for the same. In order to provide a formal structure for consultation under Section 35(2), the Liquidation Process Regulations specify the constitution of the SCC. The liquidator is required to constitute the SCC within 60 days of the liquidation commencement date. Where the liquidator differs from the advice of the SCC, she needs to record reasons in writing.
8.2. The Committee noted that the practice of seeking consultations from the SCC is already settling. Consequently, the Committee concluded that at this stage there is no gap in the Code requiring the need to statutorily encode enabling provisions for recognition of the SCC. (Refer paragraph 2.68 of the Report)
8.3. The Committee concluded that Section 35(2) may be suitably amended to provide that the liquidator must mandatorily consult with the SCC so as to ensure that the SCC is able to provide commercial inputs on the functions of the liquidator as well as conduct oversight over the liquidator. (Refer paragraph 2.74 of the Report)
9. Contribution By Secured Creditors:
9.1. During liquidation proceedings, a secured creditor has an option to realize its security interest under Section 52, rather than relinquishing it to the liquidation estate for distribution in terms of Section 53(1) of the Code. Where the secured creditor realises their security interest, the amount of CIRP costs is required to be deducted from the proceeds of the realization. Such proceeds are required to be transferred to the liquidator and will be included in the liquidation estate.
9.2. The Committee recommended that Section 52(8) of the Code may be amended
i) to state that where the secured creditor realises its security interest outside the liquidation process, the amount payable towards the workmen’s dues, as it would have shared in case it had relinquished its security interest, shall be deducted from the proceeds of such realization. (Refer paragraph 2.79 of the Report)
ii) to require a secured creditor, who stepping out of the liquidation process, to pay the liquidator for any expenses incurred by her for the preservation and protection of the security interest before its realization. (Refer paragraph 2.82 of the Report)
iii) to provide that where the secured creditor fails to make the required contributions, his security interest shall be deemed to have been relinquished and considered to be a part of the liquidation estate. (Refer paragraph 2.84 of the Report)
10. Voluntary Liquidation Process (VLP):
Part A: Requirements for initiation of VLP of an LLP
10.1 Section 59 of the Code provides for the VLP of corporate persons and lays down the procedural and substantive requirements for initiation and conduct of the VLP. While most sub-sections of Section 59 provide for the conditions and requirements of a VLP in relation to a ‘corporate person’, the text of subsections (3) to (5) primarily make reference only to a company.
10.2 The Committee was of the view that providing an explicit reference to an LLP in Section 59 is a technical issue and an amendment to address the same is not required at present. (Refer paragraph 2.88 of the Report)
Part B: Termination of VLP
10.3. Section 59 provides for a VLP for solvent corporate persons who have not committed default. While the provisions of Section 59 of the Code provide for the initiation and conduct of a VLP and the dissolution of the corporate person, they are silent on the midway termination of a VLP.
10.4. The Committee noted that the VLP is meant for solvent corporate persons who choose to liquidate themselves. In a dynamic market economy, it is commonplace for markets to evolve quickly. Thus, the financial and economic circumstances of a corporate person may change after the initiation of a VLP. For instance, a new business opportunity may arise as a result of an economic turnaround. Such scenarios would warrant the termination of the VLP. Even currently, the NCLT has already permitted termination of VLP (before dissolution) in a few cases.
10.5. Consequently, the Committee felt that a mechanism for terminating the VLP before dissolution should be provided in the Code.
10.6. The Committee decided that
i) the corporate person should pass a special resolution for terminating the VLP.
ii) Where the corporate person owed any debts to creditors on the date of such resolution, approval of creditors representing two-thirds in value of such debt should also be availed.
iii) Within seven days of the requisite approvals, the liquidator should inform the IBBI and the RoC that the VLP is terminated.
iv) Pursuant to this, the VLP will be deemed to have been terminated on the date on which such information is provided to the RoC and the term of the liquidator will come to an end.
(Refer paragraph 2.96 of the Report)
11. Operationalizing the IBC Fund:
11.1. The Committee agreed that suitable amendments may be made to Section 224 to allow the Central Government to prescribe a detailed framework for contribution to and utilization of the IBC Fund. (Refer paragraph 2.99 of the Report)
12. Additional Changes:
Part A: Appeal from orders under Section 220
12.1. The IBBI and its disciplinary committee have the power to pass various orders under Section 220 pursuant to disciplinary proceedings conducted by the IBBI.
12.2. The Committee agreed that the Code should provide a mechanism for appealing orders issued by the IBBI and its disciplinary committee under Section 220.
12.3. The Code currently provides that appeals from orders of the IBBI under Sections 201(Registration of insolvency professional agency) and 210 (Registration of information utility) will be made to the NCLAT. Thus, the Committee suggested that appeals from orders under Section 220 may be filed with the NCLAT as well, and suitable amendments should be made to the Code for the same. (Refer paragraph 2.102 of the Report)
Part B: Scope of subordinate legislation
12.4. Sections 239(1) and 240(1) respectively provide the general power for making rules and regulations under the Code. It was brought to the notice of the Committee that these provisions are limited to permitting the making of subordinate legislation for the carrying out the “provisions” of the Code.
12.5. The usage of the word “purposes” rather than “provisions” provides a wider power to regulatory bodies and the Central Government to legislate on matters that may not have been envisaged at the time enacting the statute.
12.6. The Committee agreed that Section 239(1) and 240(1) may be amended to allow subordinate legislation making for carrying out the “purposes” of the Code. (Refer paragraph 2.105 of the Report)
Please find attached a copy of the Report.
This update has been contributed by Ranjit Shetty (Senior Partner) and Tejas Gokhale (Senior Associate).
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