The Parliamentary Standing Committee on Finance for the year 2020-2021 (Standing Committee) has published the 32nd Report on Implementation of Insolvency and Bankruptcy Code - Pitfalls and Solutions (Report) on 29 July 2021.
The Report includes various observations and recommendations of the Standing Committee with respect to the Insolvency and Bankruptcy Code 2016 (IBC) and the insolvency resolution regime in India.
The Report may play a pivotal role in determining the future of the insolvency resolution regime in India by way of legislative amendments to IBC.
This article analyses and provides a critique of the observations and recommendations provided in the Report from a theoretical and practical perspective based on the experience of the authors with the intent that the same may be considered by the legislature and the esteemed authorities in the field of insolvency resolution such as the Insolvency and Bankruptcy Board of India (IBBI If a corporate debtor has factory A, B and C and the successful resolution plan only takes over factory A, then it is not clear who will operate factory B and C, or whether corporate debtor is constrained to operate factory B and C.) to strengthen the legislation and applicable rules and regulations of insolvency resolution.
Our views on some of the observations and recommendations provided in the Report are provided below:
- The Standing Committee found that a low recovery rate with 95% haircut and delay in the resolution process with more than 71% cases pending for more than 180 days deviates from the objective of the IBC. To address this the Report provides that a benchmark for the quantum of hair-cut comparable to global standards may be provided.
- We understand that while providing a benchmark for quantum of haircut will address the low recovery rate, however it may reduce the number of prospective resolution applicants submitting their resolution plan in the corporate insolvency resolution process ("CIRP") which will ultimately make insolvency resolution an unattractive proposition for prospective resolution applicants. The liberty to fix the haircut currently provided to the prospective resolution applicants will be curbed and the prospective resolution applicants will not be in a position to exercise their commercial discretion. We understand that the objective of the IBC is insolvency resolution of the corporate debtor and to provide maximum settlement to the creditors; however, a prospective resolution applicant will only participate in the CIRP if it is a commercially viable decision for the business of the prospective resolution applicant rather than a decision based on higher recovery rate of the creditors.
It may also be seen that the current interpretation of the Hon'ble Supreme Court of India qua 'commercial wisdom of committee of creditors' holds that commercial wisdom is to be freely exercised other than those necessary restraints directly provided under the IBC itself, like payment of liquidation value to operational creditors and dissenting financial creditors.
By providing a benchmark for haircuts, the legislature may infringe upon this paramount aspect of commercial wisdom and would infact restrict commercial wisdom to certain set parameters. Further, this would have to be necessarily done by way of an amendment to the IBC and not the regulations. Further, any such proposal should necessarily be seen in light of the rationale adopted by the Hon'ble Supreme Court in interpreting that commercial wisdom of the committee of creditors as supreme.
- To establish 'Institute of Resolution Professionals' to oversee and regulate the functioning of the resolution professionals.
- Taking a cue from the Institute of Charted Accounts of India, the Report suggests establishment of an Institute of Resolution Professionals. Our view aligns with the reasoning provided in the Report. Establishment of the said institute will centralize the oversight and regulation of functioning of insolvency professionals at the first level. However, all decisions and finality on any guideline/decision concerning insolvency professionals should lie with the IBBI. The proposed Institute of Resolution Professionals should conduct its functioning under the purview of the IBBI.
- To provide a professional code of conduct for the committee of creditors to define their decisions.
- In our humble understanding the recommendation of the Report to provide a professional code of conduct for the committee of creditors will do more harm than good. We understand that in order to take this forward, the principle of commercial wisdom of the committee of creditors, as laid down by the Hon'ble Supreme Court of India in various judgments, would severely be undermined if there is a professional code of conduct imposed on the committee of creditors. We understand that ultimately to a large extent it is the dues of the committee of creditors which is due in any CIRP and in view of this, the supremacy of the wisdom of the committee of creditors should be supported to the extent it is in compliance with the IBC and the other applicable laws. We note that the Report specifically mentions that IBBI should frame guidelines with respect to replacement of the interim resolution professional/transparency in selection of resolution professionals, however the Report is silent on other aspects of the guidelines. The CIRP is timebound in nature. The approval of the committee of creditors is required at every stage of CIRP. By providing further guidelines (which may not be necessary) to be complied with by the committee of creditors will only cause further delays. The objective of the IBC for insolvency resolution in a timely manner should be considered while incorporating any procedural guidelines. This is akin to creating a supervisory body for a supervisory and decision making body (i.e., committee of creditors), which essentially is what the IBC was enacted to avoid. Creation of such multiple authorities will curtail the very ambition of IBC that is, providing a viable resolution for stressed assets in a time bound manner while ensuring value maximisation.
- Adjudicating Authority should admit CIRP initiation applications within 30 days and transfer control to a resolution professional within this time period. Currently the Adjudicating Authority take considerable time to admit cases to initiate CIRP.
- We note that the IBC provides the Adjudicating Authority to adjudicate on the insolvency resolution commencement application within 14 days of its receipt. In practice the Adjudicating Authority has often taken more than a year to adjudicate on the insolvency resolution commencement application. We understand that the considerable delay in adjudication is attributable to the lack of adequate number of Adjudicating Authorities, lack of infrastructure and consequently an Adjudicating Authority is overburdened with cases including CIRP commencement applications. In order to resolve the delay in adjudication of inter alia the CIRP commencement applications, there is a need to increase the number of members, have infrastructure to support the same and possible distribution of the burden of cases across the Adjudicating Authorities rather than providing a timeline of 30 days for admission of cases, as this will not be implemented keeping in view that the IBC in its present form does provide a timeline of 14 days. Further, it is trite law that any fetters imposed upon a judicial authority by the legislature cannot withstand the scrutiny of law and all such attempts in the past have been turned by down by the Supreme Court of India/High Courts.
- Invited bidders should submit their resolution plans within specified deadlines. Currently, the committee of creditors have significant discretion in accepting late and unsolicited resolution plans.
- We acknowledge that the IBC is a time bound process, however in our view the ultimate objective of the IBC should supersede the procedural aspects (provided they are not in violation of the IBC). We understand that the committee of creditors should continue to exercise its discretion in matters concerning the acceptance of resolution plans. In practice, often a genuinely interested prospective resolution applicant may face justifiable / explainable delay in submission of bids due to delay in inter alia obtaining internal approvals or delay in receiving the requisite date from the resolution professional (often the management of the corporate debtor causes the delay). It is to be considered that the prospective resolution applicants have their own businesses to run and their primary obligation is not to participate in CIRP and therefore minor delays are bound to happen and should be overlooked if approved by the committee of creditors, keeping in view the objective of the IBC. A procedural delay should be overlooked when there is a possibility of insolvency resolution. A suggestion in this aspect is that there could be different thresholds for committee of creditors approval considering the amount of delay involved. This would ensure that such delays are condoned only where absolutely needed or necessary.
- Improve quality of judgments at the Adjudicating Authority level by ensuring that the judicial members are at least high court judges. Fill vacancy in the Adjudicating Authority. Involve National Law Schools at Adjudicating Authority for academic research, law clerkship, develop training material.
- Involvement of only selected colleges does not appear to be reasonable; instead there could be an assessment of individual students interested in taking up such assignments by way of online initiatives.
- Special bench for micro, small and medium enterprises.
- We understand that the insolvency regime in India may benefit from special benches for micro, small and medium enterprises as these benches may have an advantage in terms of possessing an extensive understanding of the micro, small and medium enterprises sector and may be able to speedily adjudicate upon the cases wherein there is a contradiction or conflict between the IBC and the Micro, Small and Medium Enterprises Development Act, 2006 as both are special legislations and for the betterment and development of the micro, small and medium enterprises. Further these benches will have a better understanding of the exceptions and concessions provided to the micro, small and medium enterprises by the government. However, as observed in the Report there is delay in adjudication of cases by the Adjudicating Authority and there is a need to fill up vacancies in the Adjudicating Authorities. Accordingly, keeping the circumstances in view, it may not be practical at this stage to establish a special bench exclusively for micro, small and medium enterprises unless adequate staffing of such benches is ensured.
- Adoption of the provisions of the Cross-border Insolvency framework should be expedited.
- This is an excellent initiative particularly in view of the fact that the Government of India has been on a spree of attracting more foreign direct investment into India.
- Adjudicating Authority should completely digitize their records and operations with provisions for a virtual hearing to get through the backlog and deal with the pending cases swiftly.
- In our humble experience, during the lockdown imposed on account of COVID-19, digitalization of records and operations may not be an adequate solution to clear the backlog of pending cases swiftly. During the lockdown, the Adjudicating Authority functioned by conducting virtual hearings. More often than not, complicated cases were adjourned due to reasons such as paucity of time. Further, several lawyers advocated for physical hearing. We understand that unless there are sufficient statistics to support the findings that during COVID-19 when the hearings took place virtually, the cases are comparatively being adjudicated swiftly, we understand that the backlog should be dealt with by addressing the root cause of the problem which is inadequate number of Adjudicating Authority members, lack of infrastructure to support the same and possibly the unequal distribution of cases across the tribunals.
- IBC be amended to clarify that the resolution plan can be achieved through any of the means prescribed under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations ("Regulations"), "Resolution Professionals, CoCs and certain orders of the NCLT indicate that the term 'going concern' implies that the resolution plan must result in the disposal of the entire business and operations of the CD under one plan. Actual experience has shown that bidders may be interested in selected business units or assets, rather than the entire business. A combination of bidders taking different business units or assets may well be far superior to one bidder acquiring the entire business from the CoC. However, the resolution professional does not currently have the flexibility within the IBC to dispose of the corporate defaulter across multiple bidders. The CIRF Regulation 37 does allow the resolution professional much more flexibility in developing a resolution plan across multiple bidders each taking different pieces of the corporate defaulters."
- The drafting of the said recommendation opens possibilities to several interpretations. The Report observers that bidders may be interested in selected business units or assets of the Corporate Debtor rather than taking over the entire business of the Corporate Debtor. In this regard, the Report seems to recommend that a combination of bidders taking different business units or assets may be preferable than one bidder acquiring the entire business. We understand that the ambiguous drafting of the aforesaid recommendation is open to several interpretations, while the Report is silent on the practical aspects of the recommendation. We understand that the concerned recommendation has opened the possibilities to the following mooting propositions:
(a) The quoted paragraph may be interpreted to mean that the Report is simply acknowledging that Regulation 37(a) of the Regulations provides that, "A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following: - (a) transfer of all or part of the assets of the corporate debtor to one or more persons" , and therefore to strengthen this provision the IBC may be amended to enact the provision of Regulation 37(a) in the IBC. We understand the concerned regulation provides that a resolution plan may provide that the resolution applicant can transfer the assets of the corporate debtor to entities other than itself, after being declared as the successful resolution applicant and after paying the creditors in terms of the resolution plan.
(b) The concerned recommendation may be interpreted to mean that the Report is recommending that by the resolution plan, a prospective resolution applicant can selectively choose the assets of the corporate debtor which the prospective resolution applicant is interested in. In our view the implementation of such a resolution plan is not practical. Upon commencement of the CIRP, the management and Board of the corporate debtor are suspended. It is envisaged that the conclusion of CIRP should result in either a resolution applicant taking over the corporate debtor, or the liquidation of the corporate debtor. During CIRP the corporate debtor is managed by the insolvency professionals. If a corporate debtor has factory A, B and C and the successful resolution plan only takes over factory A, then it is not clear who will operate factory B and C.
(c) The concerned recommendation provides that, "However, the resolution professional does not currently have the flexibility within the IBC to dispose of the corporate defaulter across multiple bidders. The CIRP Regulation 37 does allow the resolution professional much more flexibility in developing a resolution plan across multiple bidders each taking different pieces of the corporate defaulter" this may be interpreted to mean that each prospective resolution applicant submits its bid and the resolution professional (we understand in consultation with the committee of creditors) identifies aspects of each resolution plan which is favourable towards each individual asset of the corporate debtor and presents the resolution plan to the committee of creditors in such a manner that the most viable outcome is achieved. Differently put, the resolution professional tailor makes one resolution plan based on the best suited aspects from each resolution plan. For example, a corporate debtor may have varied businesses. Prospective resolution applicant A is in the hospitality sector, it is assumed that the resolution plan submitted by A may have more viable options for the hotels of the corporate debtor, rather than the schools owned by the corporate debtor. Further, let's assume that the prospective resolution applicant B is in the education sector and therefore the resolution plan submitted by B will have more viable options for the schools of the corporate debtor, rather than the hotels. In view of this, the resolution professional identifies these inclinations of A and B and accordingly voting may be done in a manner wherein A and B both are successful resolution applicants with respect to the different assets i.e., hotels and schools separately.
- It is provided in the Report that, "Similarly, while liquidation under Section 54 of the IBC requires dissolution of the corporate defaulter, Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Liquidation Regulations") inter alia provides for sale of the assets of the CD during liquidation. The NCLT, Principal bench in the matter of Invest Asset Securitisations & Reconstruction Pvt. Ltd vs. Mohan Gems & Jewels Pvt. Ltd.; CP No. 590 (PB) of 2018 has also taken a view that liquidation requires dissolution under the IBC and hence regulations that provide for liquidation as a going concern are ultra-vires and that the legislation has created further uncertainty. Therefore, Regulation 32 (e) of the Liquidation Regulations maybe deleted. Additionally, Regulation 32 (f) of the Liquidation Regulations maybe be amended appropriately."
- We understand that deleting the regulation for sale of corporate debtor during liquidation as a going concern is an important recommendation as providing such a mechanism essentially means that the 330 days spent in CIRP are of no value. The IBC as it stands today is very clear that if there is no resolution, then the corporate debtor has to undergo liquidation. This principle is very clear and important as there needs to be a clear difference between resolution and liquidation. By allowing sale of the corporate debtor (instead of its assets) as a going concern in liquidation, and providing the benefits available in the CIRP to a resolution applicant even during liquidation, there would be no incentive for any stakeholder to endeavour for resolution.
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