On July 25, 2019, the Insolvency and Bankruptcy Board of India ("IBBI") notified amendments1 to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the "CIRP Regulations") and the IBBI (Liquidation Process) Regulations, 2016 ("Liquidation Regulations").
The amendments have immediate effect and are introduced with an aim to achieve the primary purpose of the Insolvency and Bankruptcy Code of India, 2016 (the "Code"), which is the early resolution of stressed assets. We discuss below, some of the key amendments that the regulations have introduced.
2. AMENDMENTS TO THE CIRP REGULATIONS
2.1. Withdrawal of Application2
Previously, the unamended CIRP Regulations provided that an application admitted for initiation of insolvency resolution process could only be withdrawn before the issuance of an invitation for expression of interest from the prospective resolution applicants. Additionally, the application could have been withdrawn only if approval of at least 90% (voting share) of the Committee of Creditors ("CoC") was obtained.
With the notification of the amendment to the CIRP Regulations, the application can be withdrawn even after the issuance of an invitation for expression of interest or before the constitution of the CoC. The approval from the CoC would only be required in cases where the CoC has been constituted.
2.2. Meeting Liquidation Costs
Regulation 39 (B) has been introduced to the CIRP Regulations which provides that the CoC while approving a resolution plan or deciding to liquidate the corporate debtor may, in consultation with the resolution professional, make a best estimate of the 'amount required to meet liquidation costs' and 'liquid assets available to meet the liquidation costs' if an order for liquidation is passed by the National Company Law Tribunal (the "NCLT").
Where the amount of liquid assets is less than the liquidation costs, the CoC shall approve a plan providing for contribution for the balance amount, which is required to be submitted by the resolution professional to the NCLT while filing the approval or the decision of the CoC with the NCLT.
2.3. Sale of the Corporate Debtor or its Business
Regulation 39 (C) has also been introduced to the CIRP Regulations which provides that the CoC while approving a resolution plan or deciding to liquidate the corporate debtor may now recommend the liquidator to first explore the 'sale of the corporate debtor as a going concern' or 'sale of the business of the corporate debtor as a going concern'.
Upon such recommendation, the CoC shall identify and group the assets and liabilities according to its commercial considerations. Further, the resolution professional is required to submit the recommendation to the NCLT while filing the approval or decision of the CoC with the NCLT.
2.4. Liquidator's Fees
Regulation 39(D) has been introduced by the amendment to the CIRP Regulations to provide that the CoC while approving a resolution plan or deciding to liquidate the corporate debtor may in consultation with the resolution professional fix the fee payable to the liquidator, if an order for liquidation of the corporate debtor is passed. Further, the liquidator's fees has been linked to: (a) the period, if any, which has been used for compromise or arrangement under the Companies Act, 2013, (b) sale of the corporate debtor or business of the corporate debtor as a going concern, and (c) the balance period of liquidation.
3. AMENDMENTS TO THE LIQUIDATION REGULATIONS
3.1. Contributions to Liquidation Costs
Regulation 2A to the Liquidation Regulations has been introduced to provide that in cases where the CoC approves a resolution plan which does not provide for contribution for meeting the difference between the liquid assets and the liquidation costs, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, in proportion to the financial debts owed to them by the corporate debtor.
3.2. Time Period for Compromise or Arrangement
Regulation 2B has been introduced by the amendment to the Liquidation Regulations to provide that where a compromise or an arrangement is proposed under Section 230 of the Companies Act, 2013, it shall be completed within a period of 90 days from the date on which the order for liquidation has been passed. Further, such time period of 90 days will be excluded from the liquidation period.
Previously, the unamended Liquidation Regulations provided for 'Proof of claims' where a stakeholder was required to prove his claim of debt or dues to him including interest as on the liquidation commencement date.
The existing regulation has been substituted to provide for 'Submission of claim', wherein a person claiming to be a stakeholder may submit or update his claim (including interest) during the corporate insolvency resolution process, on or before the last date mentioned in the public announcement.
3.4. Security Interest
Regulation 21A to the Liquidation Regulations has been introduced to provide that a secured creditor is required to inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest.
If the secured creditor fails to intimate its decision within 30 days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate.
Additionally, it has been provided that in case the secured creditor chooses to realise its security interest, it shall be required to share the same amount towards the costs of insolvency and liquidation process and towards workmen dues for the period of 24 months preceding the liquidation commencement date, in the manner it would have shared in case it had not realised its security interest.
3.5. Stakeholders' Consultation Committee
Regulation 31 A has been introduced in the Liquidation Regulations to provide that a stakeholders' consultation committee is required to be constituted by the liquidator within 60 days from the liquidation commencement date, to advice the liquidator on matters relating to the sale of assets of the corporate debtor. However, the advice, which is required to be cleared by 66% voting share of the committee, shall not be binding on the liquidator.
The maximum representation on the stakeholders' consultation committee has been reserved for the secured financial creditors who have relinquished their security interest, followed by unsecured financial creditors, with the shareholders being last in the order of priority.
3.6. Sale as a Going Concern
Regulation 32A of the Liquidation Regulations has been introduced keeping in mind the amendment to the CIRP Regulations which provides that the sale of the corporate debtor or the business of the corporate debtor may be given precedence over the other forms of sale of assets.
Amongst others, it also provides the time frame of 90 days from the liquidation commencement date for the completion of the sale of assets as a going concern, failing which the liquidator shall proceed to sell the assets of the corporate debtor by other methods laid down under Regulation 32 of the Liquidation Regulations.
The liquidation process was previously required to be completed within 2 years by the liquidator. The amendments requires the completion of liquidation process within 1 year from its commencement, notwithstanding pendency of applications for avoidance transactions. In case the sale of assets is being made as a going concern, an additional time period of 90 days has been provided. 4
Further, a new model timeline for a liquidation process has been provided for various tasks.
|No.||Description of Task||Days (if not specified otherwise)|
|1.||Commencement of liquidation and appointment of liquidator||T = 0|
|2.||Public announcement in Form B||T + 5|
|3.||Appointment of registered valuers||T + 7|
|4.||Intimation of decision on relinquishment of security interest||T + 30|
|5.||Withdrawal/ modification of claim||T + 44|
|6.||Verification of claims received||T + 60|
|7.||Constitution of Stakeholder Consultation Committee||T + 60|
|8.||Intimation about decision of acceptance/ rejection of claim||T + 67|
|9.||Filing the list of stakeholders and announcement to public||T + 75|
|10.||Appeal by a creditor against the decision of the liquidator||T + 81|
|11.||Preliminary report to the NCLT||T + 75|
|12.||Asset memorandum||T + 75|
|13.||Submission of progress reports to NCLT; and Asset Sale report to be enclosed with every progress report, if sales are made||Within 15 days of each
audited accounts of liquidator's receipt & payments for the financial year - before15th April
|14.||Progress report in case of cessation of liquidator||Date of cessation + 15|
|15.||Information to secured creditors||Date of intimation + 21|
|16.||Distribution of the proceeds to the stakeholders||Date of Realisation + 90|
|17.||Application to NCLT for Disclaimer of onerous property||T + 6 months|
|18.||Liquidation of corporate debtor.||T + 365|
|19.||Application to NCLT for order on unclaimed proceeds of liquidation or undistributed assets.||Before dissolution order|
|20.||Time period to H1 bidder to provide balance sale consideration||Within 90 days of the date of invitation to provide the balance amount.|
The amendments intend to simplify and expedite the processes and procedures for recovery of debts and increase creditor confidence. The reduction of time period to complete the liquidation process from 2 years to 1 year (plus 90 days in cases where the sale is as a going concern) including a model time line, highlights the importance of time bound resolution.
The amendments address the concern of a smooth withdrawal of applications, where the applicants prefer restructuring of the company over liquidation.
Previously, irrespective of whether a claim had been filed during the insolvency resolution process, it was required to be submitted again during the liquidation process. The amendment now provides that the claim can be updated, which reduces compliance requirements and the risk of oversight by the creditors.
The introduction of a regulation recognising the financing of liquidation costs would be beneficial for the liquidators and the creditors, as it would make the process for the liquidators smoother and provide comfort to the banks to finance such costs.
Providing a timeline for the secured creditors to make a decision regarding relinquishment of security interest is another step to ensure timebound resolution and to protect the value of the assets of the corporate debtor.
The constitution of the stakeholders' consultation committee envisages a more democratic approach in the liquidation process of the corporate debtor.
The Liquidation Regulations dealing with compromise or arrangement and sale of the assets or business of the corporate debtor seem to have been introduced recognising the importance of providing another opportunity of revival to the corporate debtor and to realise maximum value.
Further, in both cases a timeline of 90 days has been imposed which, coupled with the reduction of time period to complete the liquidation process (1 year), is a welcome move towards ensuring the objective of time bound resolution of stressed assets.
1. The notified amendments are the IBBI (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2019 and the IBBI (Liquidation Process) (Amendment) Regulations, 2019.
2. Regulation 30A, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2019.
3. Regulation 16, Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019.
4. Regulation 44, Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.