India: HSA | Restructuring & Insolvency Monthly Update | November 2023

Discussion paper on amendments to IBBI (Insolvency Resolution Process for Corporate Process) Regulations, 2016

• The Insolvency and Bankruptcy Board of India (IBBI) vide discussion paper dated November 01, 2023 sought comments on the prospective amendments to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Process) Regulations, 2016 (CIRP Regulations). The paper deals with the proposed amendments focusing on bridging certain existing gaps in the procedure of the Corporate Insolvency Resolution Process (CIRP), and outlines 7 distinct issues in the CIRP and proposes amendments to address the same:
  • Approval of Committee of Creditors (CoC) for insolvency resolution process cost
  • Monthly CoC meetings
  • Discussion of valuation methodology and report with CoC
  • Disclosure of valuation reports
  • Continuation of process activities pending disposal of extension application by the Adjudicating Authority (AA)
  • Clarity in minimum entitlement to dissenting financial creditors
  • Mandatory contents of resolution plan
    
    
• The amendments thereunder are as follows:
  • Approval of CoC for insolvency resolution process cost: Regulation 31B is proposed to be inserted in CIRP Regulations. This regulation puts an obligation on the insolvency professional to seek permission from the CoC for all expenses, including expenses incurred in running the business of the corporate debtor as a going concern. This is important to ensure that the reins of control are under the most pivotal decision-making body, i.e., the CoC. All financial creditors of the insolvent entity should not only be aware of the operational status of the corporate debtor but should also determine how and in what manner the CIRP takes place. Maintaining the corporate debtor as a going concern during CIRP is crucial to ensure its operational continuity and secure better returns for creditors.
  • Monthly CoC meetings: The Insolvency and Bankruptcy Code (IBC) is a time-bound mechanism that stipulates a timeline of 180 days to complete the CIRP. This ensures that the viability of a business does not deteriorate further. However, there is a roadblock that hinders the smooth functioning of IBC by stalling the momentum of the resolution process. There have been cases where a gap of 6 months has been left between 2 successive CoC meetings. Examples such as this show how the gap conflicts with the intended agility of the process. The root cause of this problem is that when there are no items on the agenda, CoC meetings tend to be deferred. This creates an obstacle in achieving consistent and timely resolutions. In order to facilitate swift feedback, establish a forum for addressing emerging issues, and encourage a cooperative atmosphere among stakeholders, an amendment is proposed to incorporate Regulation 18(1) into the CIRP Regulations. This amendment stipulates that there should not be a time gap of more than 30 days between any two CoC meetings.
  • Discussion of valuation methodology and report with CoC: Until now, according to the CIRP Regulations, the valuation report that contained the methodology of liquidation value and fair market value was only shared with the CoC after the receipt of the Resolution Plan. This had a direct impact on the CoC's decision-making process regarding the eligibility criteria for the prospective resolution applicants as the CoC possessed limited knowledge and understanding regarding to valuation methodology which could subsequently cause disputes. In order to address this issue, a proactive approach is proposed under Regulation 35(1)(a) of CIRP Regulations, which mandates that valuers explain the valuation methodology they adopt to the CoC before computation of the estimates.
  • Disclosure of fair value in the information memorandum: To ensure transparency and encourage participation at the Request for Resolution Plan (RFRP) stage, it was proposed under Regulation 36(2)(1) that resolution applicants should have access to the fair value of the corporate debtor. Previously, this information was only available to the Resolution Professional (RP) and CoC, which created an information asymmetry. This transparency ensures that all resolution applicants operate with the same set of information.
  • Continuation of process activities pending disposal of extension application by the AA: In order to prevent the process from being stranded due to a stalled application for extension of CIRP before the AA, a proposed amendment to Regulation 40 of the CIRP Regulations adds a clarification which enables the RP to continue his functions in the CIRP for the period when the application seeking extension of the corporate insolvency resolution process is filed by the RP until the application for extension is decided by AA.
  • Clarity in minimum entitlement to dissenting financial creditors: The Regulation 38 of the CIRP Regulations protects the dissenting financial creditors, stating that they will be paid in priority to the assenting financial creditors. Additionally, Section 30(2)(b) of the IBC ensures that the dissenting financial creditors will be paid no less than the realizable amount in case of liquidation, when the resolution plan is approved. However, this poses a problem because Regulation 2(1)(k) calculates the value of a corporate debtor as on the insolvency commencement date, which can lead to a higher return for the dissenting financial creditors. This is because the assets of the corporate debtor may deteriorate during the CIRP process, making the notional value at the start of the process higher than the actual value of the corporate debtor. Moreover, this may incentivize liquidation as it can be more economically lucrative to go against the resolution plan. To address this issue, definition of 'amount due in the event of liquidation' is proposed to be added under the CIRP Regulations by insertion under Regulation 2(1)(ka) whereby it is envisaged that 'amount due in the event of liquidation' is the lower of the amount that would have been paid to the creditors under the resolution plan's distribution order or the liquidation value as defined under these regulations and distributed by the order of priority in Section 53(1) of the IBC. A clarification is also added to Regulation 38(1)(b) which provides that in no circumstance will the financial creditors who voted in favor of the resolution plan be paid higher percent of its dues, than the dissenting financial creditors.
  • Mandatory contents of resolution plan: To enhance the efficiency of the resolution process and minimize implementation delays, a proposal is made to bifurcate the resolution plan into two distinct parts. Part A of the plan will focus on the inflow i.e., payment under the resolution plan (total value of the resolution plan), payment of insolvency resolution process cost, payment schedule, feasibility, and viability of the resolution plan etc. Meanwhile, Part B will specifically address the allocation of funds among diverse stakeholders. This two-part structure aims to empower the Adjudicating Authority to initially endorse the resolution plan, thereby granting control to the resolution applicant for the inflow to commence and the corporate debtor to resume operations. The subsequent segment will handle the equitable distribution among stakeholders. In the event of any disputes or legal proceedings, contested amounts may be securely held in an escrow account until resolution, with distribution occurring post-litigation upon the conclusive determination of distribution-related matters

Discussion paper on streamlining the voluntary liquidation process

• IBBI vide its discussion paper dated October 05, 2023 sought comments on the prospective amendments to the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (Voluntary Liquidation Process Regulations).
• It was observed that while the IBC envisages a process of 90 to 270 days for voluntary liquidation, as on August 31, 2023 around 55% of ongoing cases were continuing for over a year on account of the following reasons: delay in making foreign remittances, pending appeals regarding demand/penalty imposed and refund from statutory departments/other litigations.
• In order to limit such delays, the IBBI has proposed that at the time of the declaration of initiation of the voluntary liquidation process, the directors of corporate persons shall be mandated to make disclosures regarding pending litigations and assessments before statutory authorities, and to ensure that sufficient provisions have been made to meet the obligations arising from these proceedings/assessments.
• The IBBI has further proposed that in the event the liquidator fails to complete the process within the prescribed timeframe of 270 days, he shall call a meeting of contributories of the corporate person and within 15 days, file a status report with the IBBI explaining the reasons for delay and specifying the additional time required to complete the process.
• In case of voluntary liquidation of financial service providers, it was observed that during the period between the submission of the dissolution application and the passing of the dissolution order, several claimants were approaching the IBBI for withdrawal, from the funds deposited with the IBBI, of the amount they were entitled to receive subsequent to the dissolution order. In order to ensure legitimacy of such claims, the IBBI has proposed that in cases of claims for withdrawal received prior to the dissolution order, the liquidator, on the instructions of the IBBI, shall verify the legitimacy of the claim and submit his/her findings and opinions to the IBBI.
• Further, to ensure the streamlining of records, the IBBI has proposed to provide that the Form H, final report as well as the dissolution order be submitted to the IBBI in an electronic platform.

Discussion paper on strengthening the liquidation process

• IBBI vide discussion paper dated October 20, 2023 sought comments on the prospective amendments to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Process Regulations) and has proposed the following amendments in order to strengthen the existing regulatory framework and respond to the emerging needs.
• Review of auction process under the Liquidation Regulations: In order to enhance the auction process under IBC, IBBI has proposed the following amendments.
  • Participation of prospective bidders in an auction process on the basis of affidavit/declaration on his eligibility under Section 29A of the IBC. In the event a prospective bidder submits wrong affidavit of being Section 29A compliant, then apart from losing the right to participate in the auction, his Ernest Money Deposit (EMD) shall stand forfeited.
  • In order to provide a level playing field to all the prospective bidders and to raise transparency, IBBI has proposed listing of all the assets of a corporate debtor along with all the relevant information, as mentioned in the asset memorandum, on a centralized listing platform (as maybe notified by IBBI).
  • Further, IBBI has proposed mandatory consultation with the Stakeholders Consultation Committee (SCC) in case the highest bid above the reserve price is rejected by a liquidator.
  • IBBI has also proposed to delete Clause 4A of the Schedule I of Liquidation Process Regulations which allows 25% reduction in the reserve price on account of failure of the first auction for the corporate debtor, to ensure value maximization of the corporate debtor.
• IBBI has proposed mandatory consultation with SCC for:
  • Private sale under liquidation
  • Finalization of valuation reports (in case of fresh valuation)
  • Applying to the AA for early dissolution of the corporate debtor
  • Continuation or initiation of any legal proceeding in respect of the corporate debtor under Regulation 33(5) of the Liquidation Process Regulations

• Further, in order to improvise the process of decision making, IBBI has proposed that in the event the running of business of the corporate debtor is economically unviable, the liquidator shall consult the SCC to decide whether to keep the corporate debtor as a going concern or otherwise and shall act as per the advice of the liquidator. Where the liquidator is unable to sell the corporate debtor as a going concern though business of the corporate debtor is running as going concern, he shall inform the reason for such failure to SCC and seek its advice to review the marketing strategy already adopted for previous auctions, to attract potential bidders in future auctions.
• IBBI has also mandated to inform the SCC on any cost overrun by the corporate debtor against the cost mentioned in the preliminary report or if the cost exceeds 10% of the liquidation value of the corporate debtor.
• To facilitate calculation of liquidator's fee in a transparent manner and to remove duplication of work, IBBI has proposed that liquidator's fee specified in the first column in Regulation 4(2)(b) of the Liquidation Process Regulation will be applicable for the realization made up to the end of 6 months from the end of quarter in which liquidation has commenced. However, no period will be allowed to be excluded on account of inability to sell assets because of any litigation. 
• It has been observed that a SCC might possess critical information or perspectives about the corporate debtor, which a liquidator might not be privy to and therefore, their input can help in ensuring the accuracy and completeness of a preliminary report submitted under Regulation 13 of the Liquidation Process Regulations, especially in cases where the books of the corporate debtor are either not available or unreliable. Thus, IBBI has proposed that the liquidator shall seek suggestions/observations of the SCC on the draft preliminary report and finalize it, after considering such suggestions/observations.
• IBBI has also suggested amendments in Form H submitted under Regulation 45(3) of the Liquidation Process Regulations to capture details regarding the realization and distribution made during the process.
• Further, for maximizing the value of assets of the corporate debtor, IBBI has proposed that a liquidator may assign assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions referred to in Sections 43 to 51 and Section 66 of the IBC even before the adjudication of such proceedings by the AA.
• Additionally, in order to address the issue of distribution after the submission of final report (before the order of dissolution), IBBI has proposed that on receipt of a request for withdrawal, IBBI shall direct the liquidator to verify the legitimacy of the claim and submit its findings to IBBI to permit withdrawal even before dissolution.

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