Ministry of Corporate Affairs proposes changes to the Insolvency and Bankruptcy Code for time bound resolution of stressed assets.
Ministry of Corporate Affairs (“MCA”) has, vide a notification dated 23 December 2021, proposed amendments to the Insolvency and Bankruptcy Code, 2016 (“Code”) to facilitate a swift admission process, streamline provisions concerning avoidable transactions and wrongful trading, and promote timely approval of resolution plans.
The key changes proposed by the MCA are mentioned below:
1. Use of Information Utilities for swift admission of insolvency proceedings
Information Utilities (“IU”) are data repositories of financial information, that receive, authenticate, and maintain financial information related to a debtor. This information of the debtor such as borrowings, default, and security interests, among others are provided to businesses, financial institutions, adjudicating authorities, insolvency professionals, etc.
As per the scheme of the Code, insolvency proceedings can be triggered by the financial creditors of a corporate debtor by filing an application in a specified form (Form 1) along with the record of the default. As per Form 1, record of default with IU is listed among the documents acceptable as evidence of default. Upon submission of application, National Company Law Tribunal (“NCLT”) is required to ascertain the existence of default from the records of an IU or on the basis of other evidence furnished by the financial creditor, and then accept or reject the application filed by the financial creditor within a period of 14 (fourteen) days.
In order to ensure that the 14 (fourteen) days' timelines are met, MCA has proposed that financial creditors may be required to submit only IU authenticated records to establish default for the purposes of admission of their application. Subsequently, the NCLTs would only be required to consider IU authenticated records as evidence of default leading to quicker disposal of insolvency applications. Further, upon initiation of insolvency proceedings, when public announcement is made by the Resolution Professional calling for claims, financial creditors may submit their claims along with sufficient proof of such claims. In this regard, records available with an IU is to be accepted as a proof of existence of debt.
2. Streamlining provisions concerning avoidable transactions and wrongful trading
The Code provides for identifying and reversing transactions which are prejudicial to the interest of the creditors, referred to as avoidable transactions. Such avoidable transactions are to be identified by the Resolution Professional during the insolvency process so that they can be reversed / cancelled. For this, the Code provides a two-year ‘look-back period' which starts from the date the insolvency application is allowed by the NCLT. MCA has proposed to make this look-back period effective from the date of filing the petition seeking insolvency instead of the date of commencement of insolvency process. Further, the period between the date of filing and the date of commencement of insolvency process may additionally be included in the suspect period for such transactions.
Amendments are also proposed to ensure that the Resolution Professional gets the requisite cooperation for collection of information for the conduct of the insolvency process and for identifying avoidable transactions and filing of applications against such transactions. The provisions related to avoidable transactions and wrongful trading may be amended to permit creditors (individually or in groups) or the committee of creditors (“CoC”) to apply to the NCLT for avoiding such transactions, if the resolution professional or liquidator fails to make such application. It is also proposed that members or partners of the corporate debtor should no longer be allowed to make such an application.
Further, under the Code, if during the insolvency process or liquidation process it is found that any business of the corporate debtor has been carried out with intent to defraud creditors of the corporate debtor, then the Resolution Professional is empowered to make an application to the NCLT to seek contributions to the assets of the corporate debtor from the persons involved in such trading. MCA has clarified that even the liquidator shall have such powers to approach the NCLT. An amendment is also proposed to clarify that proceedings for avoidance of transactions and wrongful trading can continue even after the approval of a resolution plan by the NCLT. MCA has also proposed amendments so that the resolution plan should have to mandatorily specify the manner of undertaking proceedings for avoidance of transactions and wrongful trading and the manner of distribution of expected recoveries from such proceedings.
3. Time-period for approval of resolution plans
In order to ensure that the approval of a resolution plan by the NCLT, that has already been approved by the CoC, does not get inordinately delayed, MCA has proposed that the Code should provide a fixed time-period of 30 (thirty) days for approval or rejection of a resolution plan by the NCLT. Where the resolution plan is not approved or rejected within this time-period, the NCLT shall record reasons in writing for the same.
4. Closure of the Voluntary Liquidation Process
The Code provides for a voluntary liquidation process for solvent corporate persons who have not committed any default. However, it is silent on the withdrawal of such a process if any business opportunity arises that can make the corporate person profitable or viable after the initiation of voluntary liquidation process. The MCA has proposed an amendment to the Code so that the voluntary liquidation process may be closed by way of a special resolution and approval of creditors representing two-thirds in value of the debt (where the corporate person owes debt to any person). If such approvals are made, the liquidator may be required to make a public announcement of the closure of the process and intimate concerned authorities.
5. Insolvency and Bankruptcy Fund
The Code provides for the formation of the Insolvency and Bankruptcy Fund (“Fund”) for the purposes of insolvency resolution, liquidation, and bankruptcy of persons under the Code. As the MCA felt that the current design of the Fund does not incentivize contributions to it and provides very limited ways of utilizing the amounts contributed, it has proposed that suitable amendments be made to the Code to allow the Government to prescribe a detailed framework for contribution to and utilization of the Fund.
With the aim of tackling some difficulties faced under the Code, the MCA has proposed numerous changes to make it more robust. If implemented, these changes will ensure that delays are avoided and there is no further erosion of value of the stressed firms. Further, the Code would benefit greatly as it will serve as an easy mechanism leading to a smoother functioning of corporate insolvency resolution and liquidation process.
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