The Insolvency and Bankruptcy Code, 2016 (“Code/IBC”) is landmark legislation enacted on May 28, 2016 while those of insolvency resolution and bankruptcy of personal guarantors to corporate debtors came into effect on December 01, 2019. The Code provides for an ecosystem comprising of four pillars to help the stakeholders to resolve their stress. First of these is a class of insolvency professionals (IPs) who are regarded as front liners. IPs play a key role in the efficient working of the insolvency, liquidation, and bankruptcy processes. The second pillar is Information Utilities (IUs). IUs store financial information about debtors in electronic database and tend to cut down on delays and disputes in insolvency proceedings. The third pillar is the Adjudicating Authority (AA), namely, the National Company Law Tribunal in case of corporate insolvency and the Debt Recovery Tribunal in case of individual insolvency. The fourth pillar is the regulator, namely, the Insolvency and Bankruptcy Board of India (IBBI). IBBI is responsible for professionalising insolvency services through regulation and development of service providers, namely, insolvency professionals, insolvency professional agencies, insolvency professional entities, information utilities, registered valuers, and registered valuers' organisations. After more than five (5) years since Code's enactment, the Parliamentary Standing Committee on Finance has recently presented its 32nd Report titled ‘Implementation of IBC- Pitfalls and Solutions' in Lok Sabha on August 03, 2021. The report highlighted certain challenges faced in the implementation of the Code and provided a series of recommendations to strengthen the insolvency regime and four pillars. The contours of recommendations are as follows:
(i) Establishment of professional self-regulator for IPs:
The Committee felt that there were numerous conduct issues with regard to RPs for which the two Regulators IPA and IBBI have taken disciplinary actions on 123 IPs out of a total of 203 inspections conducted till date. Therefore, it recommended for establishment of Institute of Resolution Professionals to oversee and regulate the functioning of RPs so that there are appropriate standards and fair self- regulation. The Committee also observed that smooth functioning of Code depends on the functioning of entities viz. Insolvency Professionals, Insolvency Professional Agencies and Information Utilities and therefore, the entities have to evolve over time for which capacity enhancement should be conducted from time to time.
(ii) Code of Conduct for Committee of Creditors:
The Committee felt the need to have a professional code of conduct for the COC, which will define and circumscribe their decisions, as these have larger implications for the efficiency of the Code. The Committee also noted that during the Corporate Insolvency Resolution Process (CIRP), the Committee of Creditors (COC) decide whether to continue with the Interim Resolution Professional as the Resolution Professional or to replace the Interim Resolution Professional by another Resolution Professional without any guidelines. The Committee desires that IBBI should frame guidelines for the selection of RPs by the Committee of Creditors in a more transparent manner.
(iii) Functioning of NCLT:
The Committee noted that main reasons for delay in the insolvency resolution process are delays in admission of cases in NCLT and delays in approval of Resolution Plans by the NCLT. The Committee took note of the fact about 13,170 IBC cases are pending with the NCLT which involve an approximate amount of Rs. 9,00,000 Crore and that 71% of these cases have been pending for more than 180 days. The Committee observed that Resolution Period delays result in rapid value erosion, thereby reducing the realization value. The Committee also felt that IBC needs to be amended so that no post hoc bids are allowed during the resolution process and that there should be sanctity in deadlines, so that value is protected, and the process moves smoothly. Under the current regime, CoC have significant discretion in accepting late and unsolicited resolution plans. The Committee felt the need to appoint at least High Court judges as NCLT Judicial Members so that the country can benefit from their Judicial and procedural experience and wisdom. The Committee also stressed the need to have dedicated benches of NCLT solely for IBC, besides having specialised benches for sectors such as MSMEs with requisite domain expertise.
(iv) Need for flexible resolution plans:
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 Defaulters. It also permits transfer of all or part of the assets to one or more persons and sale of all or part of the assets as part of a Resolution Plan.
The Committee felt the need to amend IBC to clarify that the resolution plan can be achieved through any of the means prescribed under Regulations 37 of the CIRP Regulations. The amendment is necessitated since IBC is a Parliamentary Statue while the CIRP Regulations are delegated subordinate legislation and without amending the IBC, the transfer of all or part of assets as prescribed under regulation 37 cannot be achieved.
Similarly, Section 54 of the IBC requires dissolution of the Corporate Debtor and Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 inter alia provided for sale of the assets of the Corporate Debtor during liquidation. The NCLT, Principal bench in the matter of Invest Asset Securitization and Reconstructions Private Limited Vs. Mohan Gems & Jewells Private Limited (CP No. 590 (PB) of 2018) has 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, the Committee recommended for deletion of Regulation (e) besides amending Regulation 32 (f) appropriately.
The Code has been operational since the last five years. The Committee felt the desire to completely digitize the records of NCLT and NCLAT and operations with provisions for virtual hearings to get through the backlog and deal with the pending cases swiftly. The Ministry of Corporate Affairs, as the nodal Ministry, should take greater responsibility to streamline the operational processes in NCLT/ NCLAT, while constantly monitoring and analysing the work flow, disposal and outcomes with regard to resolution, recoveries, time taken, etc. Prompt remedial measures must be accordingly initiated by way of guidelines, rules or administrative orders from time to time.
(vi) Prepack for MSME:
The Committee felt the need that Pre-pack framework may be gainfully employed while strictly adhering to timelines to achieve swift and cost-effective resolutions as the survival of MSME's are indispensable for the revival of the economy. The Committee further recommend that a pre-pack resolution framework for Corporates may be rolled out to aid the existing insolvency framework in facilitating quicker and more effective resolutions and in reducing the burden of NCLTs in the aftermath of the Covid-19 pandemic, while adhering to the core principles of value maximization and timely resolutions. The pre-pack mechanism may, however, be subject to suitable review based on experience gained in due course, as the process may be prone to abuse. Currently, MSMEs are considered as Operational Creditors and comes after Secured Creditors in the waterfall mechanism. This aspect would need to be reconciled with the MSME Act and the additional protection that MSMEs may require in these economic circumstances.
(vii) Cross border insolvency:
The Committee note that the Insolvency Law Committee on Cross Border Insolvency (2018) had suggested the incorporation of UNCITRAL Model Law on Cross Border Insolvency into the Insolvency and Bankruptcy Code. The Committee also note that an expert Committee on Cross Border Insolvency Rules/ Regulations Committee (CBIRC) has been constituted for recommending rules and regulations for smooth implementation of proposed Cross Border Insolvency provisions, which are under consideration. Once the recommendations are adopted, the Committee hope that the Cross Border Insolvency framework would go a long way in ensuring coordination and communications between jurisdictions to successfully address the resolution of cross border insolvency cases. The Committee, therefore, recommends that the adoption of the provisions of the Cross Border Insolvency framework should be expedited.
(viii) Strengthening homebuyer's rights:
The Committee noted that the IBC (Second Amendment) Act, 2018 aimed to balance the interest of stakeholders, especially homebuyers and MSMEs had fixed a threshold of at least 100 homebuyers or 10% of the total flat purchasers in a real estate project for initiation of a Resolution Plan before the NCLT. The Committee has found that the buyers are facing practical difficulties in gathering the required number of homebuyers to initiate insolvency proceedings against the real estate owner. The Committee, therefore, recommend that once a single homebuyer decides to initiate Insolvency Proceedings in NCLT, the real estate owner should be obliged in the Rules/ Guidelines to provide details of other homebuyers of the project so that the required 10% or 100 homebuyers can be mobilised, which will, thus, ensure that the interest of the distressed homebuyers is duly safeguarded enabling effective operationalisation of the amended provision.
The suggestions made in the Report are in the right directions to make the Code more effective and to fix the weak spots. As the process involves many parties, including the CoC, prospective resolution applicants (PRAs), the IPs, and the AA, endeavour should be made to complete the CIRP within a period of 330 days and the timeline should be treated as a norm and not the exception. Resolution by itself is not the goal of the Code but resolution within the specific timeframe is in the essence of the Code. These are two wheels of a chariot and one aspect cannot be ignored while considering another. Both of these aspects have to go together for a successful resolution. The Hon'ble Supreme Court also recently in the matter of Civil Appeal No. 3224 of 2020 (Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited & Anr and others) took note of the judicial delays as mentioned in the Report and emphasized the need to complete the process of CIRP keeping in view the sanctity of the timeline framed under the Code. Therefore, it is hoped that the issues raised and recommendation(s) made in the Report should be taken in its true spirit and implemented swiftly to ensure that India's insolvency regime achieves and surpass its objectives and further entrepreneurship in the country. It is not out to place to mention that the Code has certainly proved to superior process compared to earlier regime but it will still have to evolve in order to be effective to meet the economic changes from time to time.
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.