India: IBBI Amends CIRP Regulations - A Booster Dose For Resolution Process?

Introduction

IBBI amended IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) on 16 September 2022 to attract investors and market participants in resolution of the stressed assets. It is no secret that resolution of stressed assets under the Insolvency and Bankruptcy Code, 2016 (IBC) is facing multiple challenges, which must be addressed for IBC to be a success story. IBBI newsletters suggest that nearly 47% of insolvency process ends up in liquidation - an alarming situation. With high inflation and rising interest rates, Indian economy can barely afford high unemployment levels on account of liquidation of stressed companies, which has other cascading effect on the economy. The authorities, therefore, must ensure that stressed assets are resolved as going concerns to preserve value and employment. In our view, the amendment to the CIRP Regulations strives to encourage resolution than liquidation - a right approach.

Information Memorandum

A resolution applicant requires realistic view of the financial health of a corporate debtor (CD) to decide on acquisition. Lack of proper information of CDs has been stonewalling the resolution process. The amendment now makes information memorandum a comprehensive document with details on operations, financial statements, and other relevant information of a CD. This will help in providing complete picture of a CD to resolution applicants and will infuse sanctity to the resolution process. But, this will also require co-operation from the erstwhile promoters and suspended directors of a CD, which may be a challenge for resolution professionals. Additionally, information memorandum now must disclose contingent liabilities (such as guarantees), to avoid any aftershock to a resolution applicant post approval of resolution plan.

Sale of Assets

The amendment permits a resolution professional to seek resolution plans for sale of one or more assets of a CD, if no resolution plan is received within the timeline. The successful resolution applicant will have to provide strategy on dealing with remaining assets of the CD. This will preserve the value of assets and also provides resolution professionals and CoC with multiple options.

Marketing of Stressed Assets

Presently, there is no effort (by either resolution professional or CoC) to attract maximum investors for a CD. The resolution professional need only publish invitation for expression of interest in newspapers and website, which is not enough for wider publication and restricts number of interested investors.

The amendment now puts onus on the resolution professional and CoC to prepare a marketing strategy for assets with valuation of more than Rs 100 crore. For assets with lesser valuation, the CoC and resolution professional may (but not necessarily) prepare strategy. The CoC will decide on the cost, a challenge for CDs not generating sufficient cash flows. The banks may be reluctant to put in cash for marketing. Overall, this will encourage resolution professionals to look for maximum investors, which will encourage competition and maximize the value of stressed assets.

Compromise or Arrangement

IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) permits compromise or arrangement under section 230 of the Companies Act, 2013 within 90 days of the liquidation order. Often, liquidation order is passed after considerable delay, which hurts realization from the assets. The amendment now permits creditors to decide on compromise or arrangement while recommending liquidation of a CD and pending the liquidation order by the Adjudicating Authority, the CoC and resolution professional are required to explore the possibility of compromise. This will save crucial time and prevent devaluation of assets on account of delay in the liquidation order. A welcome initiative.

Conclusion

The amendment is a timely action by the IBBI and aims at encouraging resolution of stressed assets - liquidation being the last resort. Hopefully, these steps should assist in more resolutions, which is beneficial for all stakeholders.

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.