The Insolvency and Bankruptcy Code, 2016 (IBC) has been widely considered a landmark legislation that has brought about a paradigm shift in the recovery and resolution process.

However, during the implementation of the IBC over the past two years and eight months, several challenges have emerged, including:

  1. The Supreme Court recognises the utmost importance of following model timelines under Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), 2016 (CIRP Regulations) to ensure timely completion of CIRP[1]. However, adherence to the timelines (, completion of corporate insolvency resolution process (CIRP) within 180 or 270 days), especially on account of intervening legal proceedings, has been almost impossible. The time spent in any legal proceedings that hampers the CIRP was excluded by the tribunals[2]. The CIRP of Essar Steel India Limited will complete 730 days on August 2, 2019!
  2. On account of judicial pronouncements[3] by the Hon’ble National Company Law Appellate Tribunal (NCLAT), including the recent one in Standard Chartered Bank vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. and Others[4], the following position had emerged: (a) financial and operational creditors must be given similar treatment (which has been interpreted to mean the same percentage of haircut); and (b) discrimination amongst financial creditors on the basis of existing priorities or security interest is not permitted in a resolution plan.
  3. The NCLAT has also held that the committee of creditors (CoC) has no role to play in determining the manner of distribution of proceeds of a resolution plan amongst the financial or operational creditors, since the financial creditors comprising the CoC are interested parties and there will be a conflict of interest if they are permitted to decide on the manner of distribution[5].
  4. In cases like Jaypee Infratech Limited, where the majority of the CoC comprises thousands of homebuyers, decision-making has been severely hampered because of creditors not voting on resolutions.
  5. Applications to initiate CIRP have taken significantly more time than the prescribed 14 days in several cases. This is despite the requirement that the Adjudicating Authority has to ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor within 14 days of the receipt of an application by such financial creditor, as the timelines have been held to be directory and not mandatory[6].
  6. It has been observed that a large volume of litigation is initiated by tax authorities against successful resolution applicants for recovery of pre-CIRP tax dues, even after approval of a resolution plan by the Adjudicating Authority.

The Government of India has taken swift action to address these burning issues by introducing the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 (IBC Bill). The IBC Bill follows the press release dated July 17, 2019 issued by the Ministry of Corporate Affairs, Government of India stating that the Union Cabinet had approved the proposal to carry out amendments with an aim to fill critical gaps in the corporate insolvency resolution framework as enshrined in the IBC, while simultaneously maximising value from the CIRP.

Unlike previous amendments to the IBC that were first brought about by way of ordinances, this time the Government has chosen not to follow that route.

Some of the key proposals are analysed below.

Definition of Resolution Plan

A new Explanation is proposed to be inserted into the definition of resolution plan[7] to clarify that a resolution plan seeking the insolvency resolution of corporate debtor as a going concern may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger.

This new Explanation provides statutory recognition (earlier provided for in Regulation 37 of the CIRP Regulations) to corporate reorganisation as a result of a resolution plan, which may result in the legal entity of the corporate debtor ceasing to exist. These reorganisation structures will now not fall foul of the ‘going concern’ requirement of the IBC and may also enable reorganisation of businesses through schemes for better value maximisation.

Adjudicating Authority to Provide Reasons for Delay in Admission or Rejection of Application by Financial Creditors

The IBC Bill seeks to insert the following provision: if an application has not been admitted or rejected within 14 days by the Adjudicating Authority, it shall provide the reasons in writing for the same.

This will prevent inordinate delays in admission (which, in turn, may lead to further value deterioration) as Adjudicating Authorities may become averse to granting adjournments and push for speedier disposal of applications filed by financial creditors.

Maximum Timeline for Completion of CIRP is 330 Days

The IBC Bill mandates that the insolvency resolution process of a corporate debtor shall not extend beyond 330 days from the insolvency commencement date. It has been clarified that such timeline will include the time taken in legal proceedings, in order to prevent undue delays in the completion of the CIRP. If the CIRP is not completed within the timelines, then the corporate debtor will have to be mandatorily liquidated. Another change sought to be introduced is where pending CIRP proceedings have extended beyond 330 days, the same will have to be completed within 90 days from the IBC Bill coming into effect.

Whilst the proposed amendment is laudable, its implementation may be challenging especially in cases where the resolution plan itself has been challenged. Further, the burgeoning number of legal proceedings are already putting pressure on the National Company Law Tribunal (NCLT) and the NCLAT, thereby causing delay in the time taken for disposal of cases. The Government has endeavoured to address this issue by augmenting the strength of NCLT by inducting more members. Further enhancement of the strength of NCLAT will also greatly assist in the process. The Adjudicating Authorities should now impose costs for frivolous legal proceedings.

The proposed amendment will instil discipline among the various stakeholders to adhere to timelines. The proposed amendment, along with the decision of the Supreme Court in ArcelorMittal that states that challenges in relation to decisions of CoC or resolution professional in respect of resolution plans can only be made at the stage when an application is filed under Section 31 of the IBC, may help in reducing the timelines involved in CIRP.

Voting by Authorised Representatives

The IBC Bill provides that in all cases (except for withdrawal of CIRP proceedings), the authorised representative will cast the vote for all financial creditors he represents in accordance with the decision of more than 50% of the voting share of the financial creditors he represents, who have cast their vote (i.e. who are present and voting).

This change will help the authorised representative to effectively participate in the CoC proceedings and cast his vote on behalf of the financial creditors he represents. It will smoothen the decision-making process in cases where debenture-holders, homebuyers or depositors form the majority of the CoC.

Treatment Under the Resolution Plan

A. Priority and Value of Security to be Considered by COC

The IBC Bill specifically provides that while approving a resolution plan, the CoC is permitted to consider the manner of distribution of proceeds and can take into account the order of priority amongst creditors, including the priority and value of the security interest of a secured creditor.

This will ensure:

  • Primacy of security arrangements amongst the creditors (including security sharing arrangements/exclusive security).
  • That the value of property rights of a secured creditor is maintained, by providing such creditor the option to dissent and receive liquidation value of his security.
  • The important role of the CoC in making decisions on distribution.

B. Concept of Dissenting Financial Creditors Re-introduced

The CIRP Regulations had earlier provided for payment of liquidation value to dissenting financial creditors. The provision was struck off following a decision of NCLAT on the grounds that the same was ultra vires the IBC[8]. The IBC Bill seeks to introduce the concept of payment of liquidation value to dissenting financial creditors in the IBC itself. A resolution plan will be required to provide that financial creditors who do not vote in favour of a resolution plan shall receive an amount that is not less than the liquidation value of their debt. This principle has been recognised under the UNCITRAL Legislative Guide on Insolvency Law as well as the World Bank’s Ease of Business parameters and will provide reasonable safeguards to various categories of investors / creditors and afford certainty and predictability to the process.

This will also re-align the IBC with the Reserve Bank of India’s circular dated June 7, 2019 for resolution of stressed assets, which also provides that a resolution plan under that circular must provide for payment of at least liquidation value to dissenting creditors.

C. Treatment of Operational Creditors

The IBC Bill provides that a resolution plan must allow for payment to operational creditors of an amount that is higher of the: (i) liquidation value of their debt or (ii) amount that would have been received if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in section 53 of the IBC.

A further Explanation is sought to be inserted to clarify that any distribution shall be ‘fair and equitable’ to such creditors. Thus, the Explanation clarifies that such distribution shall be deemed to be in compliance with the Supreme Court’s decision in Swiss Ribbons v. Union of India.

Whilst the concept of ‘fair and equitable’ cannot be defined with mathematical precision, the cue can be taken from foreign jurisdictions where the concept of ‘fair and equitable’ treatment in insolvency has been developed to mean:

  1. Creditors who are in the same class will receive similar treatment amongst themselves.
  2. A junior class of creditors will not receive any payments unless and until the senior classes above it have been paid in full.

It would be helpful if a deeming provision is provided in the Explanation so that the issue of what constitutes ‘fair and equitable’ treatment does not remain open for interpretation.

D. Applicability to Pending Cases

The amendments relating to payments to creditors under a resolution plan shall also be applicable to cases where the application for approval of the resolution plan is pending before the Adjudicating Authority or where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan.

Statutory Authorities Cannot Pursue their pre-CIRP Claims Against Successful Resolution Applicants

The IBC Bill proposes to insert a clarificatory amendment that once a resolution plan has been approved by the Adjudicating Authority, the same shall be binding on all creditors including the governmental, statutory and local authorities (Authorities) to whom a debt in respect of the payment of dues arising under any law are owed.

This amendment will ensure that Authorities respect the resolution plan approved by the Adjudicating Authority like other stakeholders of the corporate debtor and will go a long way to bringing about a closure to the various proceedings (especially tax proceedings) that are pending against successful resolution applicants. It may have also been useful to clarify that no creditor can pursue pre-CIRP claims after approval of a resolution plan by the Adjudicating Authority.

CoC May Decide for Liquidation At Any Time

The IBC Bill clarifies that the CoC may take the decision to liquidate the corporate debtor any time after the constitution of the CoC until the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

Conclusion

The proposed amendments sought to be introduced by way of the IBC Bill will restore confidence in the credit markets by, inter alia, ensuring that the fundamental principle that a secured creditor has priority over unsecured creditors is not diluted in any manner.

The IBC Bill shows that the Government is quick to react and bring about legislative changes to ensure that important legislation like the IBC is implemented to achieve its objectives. The swift action taken by the Government will help to increase confidence among the creditor and investor community.

Whilst the IBC Bill is commendable in providing a necessary course correction to the IBC, the development of distresses markets will be enhanced by the introduction of pre-packs and a cross-border insolvency framework.