India: Restructuring & Insolvency Monthly Update | July 2022

STATUTORY UPDATES

Report of the Insolvency Law Committee, May 2022

• The Insolvency Law Committee published its report on May 20, 2022 and has recommended the following amendments:
• Mandating reliance on Information Utilities (IUs) for establishing default
  • The Insolvency Law Committee (ILC) report has recommended that Financial Creditors (FCs) that are financial institutions and such other FCs notified by the Central Government, should submit IU-authenticated records alongside their Section 7 application to establish default. This is done to expedite the disposal of the application to initiate Corporate Insolvency Resolution Process (CIRP).
  • In matters where such authenticated reports are unavailable and for all other FCs, the existing system of relying on different documents for establishing default would remain applicable. The report also recommends that Operational Creditors (OCs) would be mandated to rely on IU records to establish default in due course.
• Exemptions from the scope of the moratorium
  • The ILC, after reading Section 14(1) with Section 14(3)(a) of the IBC, opined that the power of the Central Government to grant exemptions under Section 14(3)(a) of the IBC only applies to transactions, agreements, or arrangements and not legal proceedings or actions.
  • The ILC reiterated the importance of moratorium and held that it as an essential feature of Insolvency and Bankruptcy Code, 2016 (IBC) for ensuring that 'the assets of the corporate debtor are kept together during the CIRP, and the corporate debtor is continued as a going concern, thus facilitating value maximization and orderly completion of the CIRP'.
  • After analyzing the importance of moratorium, the ILC has recommended that the power to grant exemptions under Section 14(3)(a) should be exercised in exceptional circumstances. The idea behind such recommendation is to ensure smooth conduction of the CIRP and should be relaxed only when found necessary from the implementation of the IBC.
• Continuation of proceedings related to avoidable transactions and improper trading post completion of CIRP
  • Independence of proceedings for avoidance of transactions and improper trading: The ILC discussed the lack of clarity in interpretation and application of Section 26 and recommended that a clarificatory amendment should be made to the provision to explain that the continuation of proceedings for avoidable transactions or improper trading is not affected by the completion of CIRP proceedings. The ILC further recommended that Section 26 should be amended harmoniously with the 2020 report to specifically include proceedings related to improper trading.
  • Jurisdiction of the Adjudicating Authority to adjudicate the Avoidance Application after the approval of the Resolution Plan: The ILC, after a combined reading of Sections 60 and 26 of the IBC, concluded that the jurisdiction of NCLT extends to the disposal of proceedings and is not limited to a question of law. Therefore, Section 60 need not be amended in this regard.
  • Manner of conducting avoidance proceedings after conclusion of CIRP: The ILC has recommended the following amendments with respect to Resolution Plans:
    • The Resolution Plan should be mandated to specify the manner in which proceedings for avoidable transactions and wrongful trading are to be undertaken in case they are to be continued post approval of the plan.
    • The Resolution Plan should also specify the manner in which expected recoveries are to be distributed alongside the preservation of claims of expected beneficiaries, if such preservation is required. While giving the final orders in proceedings for avoidable transactions and wrongful trading, the NCLT should respect the decision of the CoC with respect to the manner of distribution of expected recoveries.
  • Change in threshold date for look-back period: The ILC recommended that the threshold date for the look-back period for avoidable transactions should be revised to be the date of filing of application for initiation of CIRP ('initiation date'). The ILC further suggested that the look-back period would also include transactions from the initiation date until the insolvency commencement date. Hence, appropriate amendments should be made in Sections 43, 46 and 50. The IBC should also be amended to clarify that where multiple CIRP applications have been filed, the initiation date would refer to the date of filing of the first CIRP application.
• Curbing the submission of unsolicited resolution plans and revisions of resolution plans
  • The ILC noted that despite the regulations' providing for stage-wise timelines, in a number of cases, the resolution professional receives resolution plans after the established deadlines. Revisions are made to submitted resolution plans in an attempt to outbid other potential resolution applicants. On certain occasions, additional resolution plans are submitted beyond the deadline provided in the Request for Resolution Plan (RFRP), either for the first time or as a revision of a plan already submitted. Such resolution plans are submitted on an unsolicited basis without the consent of the resolution professional or the CoC and such practices lead to divergent practices leading to inconsistencies, delays, and lack of procedural sanctity. The ILC noted the significance of balancing the principles of value maximization and sanctity of the CIRP.
  • Observing these divergent practices, the ILC recommended that the regulations should clearly lay down a mechanism for reviewing late submissions of resolution plans or revisions to resolution plans Further, required amendments shall be made in the IBC to ensure that the prescribed procedure has due sanctity. The CIRP regulations may allow the CoC to opt for a Swiss challenge method for considering plans and revisions to plans submitted after the deadline provided in the RFRP. CIRP regulations and RFRP may require the CoC to specify number of revisions that are permissible and the requisite timelines. The ILC also recommended that the CoC allow enough time for participants to submit resolution plans before the deadline.
• Timeline for approval or rejection of resolution plan
  • The ILC noted that the delays in the disposal of Resolutions Plans submitted to the Adjudicating Authority are often caused due to a high number of objections to the proposed Resolution Plan, or due to a high degree of pendency of cases. Such delays in the processing of the resolution plan destroy value and deter potential resolution applicants from submitting plans.
  • Hence, for the early disposal of the applications for approval or rejection of the Resolution Plan, the ILC has recommended that Section 31 should be amended to provide that Adjudicating Authority should approve or reject a Resolution Plan within 30 days of receiving it. This time period shall be subject to the time period specified for the completion of the CIRP in Section 12. Further, the Adjudicating Authority shall be required to record reasons in writing for cases where it has not passed an order approving or rejecting the Resolution Plan within the stipulated time.
• Conflicts of interest with professionals
  • The ILC considered whether situations involving conflicts of interest between professionals hired by stakeholders in a CIRP should be regulated. It noted that the current laws offer a number of protections for this. A Code of Conduct is included in the First Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Practitioners) Regulations, 2016, which govern insolvency professionals. Furthermore, in order to minimize any potential conflicts of interest, Regulation 27 of the CIRP Regulations specifies how registered valuers and other professionals shall be hired by the interim resolution professional or resolution professional.
  • In view of the abovementioned provisions and the circular, the ILC came to the conclusion that no amendment to the IBC is necessary in this regard, at this juncture. Further disclosures of conflicts may be provided in subordinate legislation.

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