Stage set for hybrid resolutions and faster realization of assets under insolvency and bankruptcy code

The Insolvency and Bankruptcy Code, 2016 (IBC Code) was implemented against the backdrop of challenges faced by the Banking Sector on account of increasing Non-Performance Assets (NPAs). While the IBC Code assimilated various principles of law and aimed to provide an effective mechanism to address insolvency, it however prescribed overly optimistic timelines for completing various processes. Put it plainly, the Indian legal eco-system was not accustomed to such a strict timeline.  As we are all aware, after an initial promising start, this optimistic timeline caved-in and the system started struggling on account of prolonged delays in resolution and liquidation processes. The issue got further complicated with an overemphasis on revival – irrespective of the viability of the entity. This put the system under excessive pressure as Resolution Professionals (RPs) and Committee of Creditors (CoC) attempted to look for plans in all matters, irrespective of the viability as well as lack of market interest.

Consequently, on account of pressure from various stakeholders to address the instances of delay and introduce more flexibility in managing the insolvency process, the Insolvency and Bankruptcy Board of India (IBBI), has introduced important amendments in the resolution and liquidation processes. The focus is on reducing delays in resolution as well as in realization of assets of the debtor at a liquidation stage. This is a much-needed addition.

A critical issue which has been addressed is the flexibility provided to the RP and CoC to look for alternatives for revival by way of multiple plans including sale of assets. There is an impetus on dissemination of increased critical information under the Information Memorandum and adopting an appropriate market strategy to increase participation and competition.

Also, while the Code already contains provisions enabling the CoC to approve transfer of assets (which is not subject to any charge and the value is below the prescribed percentage) of the Corporate Debtor (debtor) during CIRP, this cannot be used as mode of resolution. While Regulation 37 of the CIRP Regulations permits submission of resolution plans and contains a proposal for transfer or sale of all or part of the assets of the debtor, on account of an emphasis on revival of the debtor, the focus remined on a single composite resolution plan.

Though the Code already had this flexibility, with a view to bringing in more clarity, the IBBI has introduced provisions in the CIRP Regulations enabling the possibility of exploring multiple resolution plans for sale of assets of the debtor where the debtor, in the first attempt, failed to garner a resolution plan. This would also shorten the liquidation process of entities where entire assets of the debtor gets disposed of by way of resolution plan(s).

This new system, however, brings its own set of challenges as it calls for much more skin in the game and more involvement on the part of RPs and CoC to work out a relevant strategy best suited given the circumstances of the enterprise. This also calls for the lenders to nominate officials in CoC who have requisite expertise and experience in dealing with the relevant type of cases.

The IBBI has also introduced few changes in Liquidation Regulations to address certain gaps which include the continuation of the role of CoC to advise the liquidator till the formation of the Stakeholder Consultative Committee (SCC). The role of the SCC has also been increased to cover additional areas such as fee of the liquidator, valuation of assets and dealing with proceedings for avoidance transactions.

Also, the time prescribed for successive auctions (when a previous auction has failed) has been reduced to fifteen days which can be further altered based on the recommendation of SCC. These changes which provide more clarity & also a wider scope on the role of the SCC would help in avoiding conflicts between SCC and the Liquidator.

Added to that, the Supreme Court in its recent judgement in the ABG Shipyard Case, has also extended the concept of ‘Commercial Wisdom’ at the stage of liquidation and extends to the advice given by the SCC to the Liquidator as regards disposal of assets. This judgement has also cleared the way for sale of assets by way of private treaty (subject to certain safeguards).

IBBI has also tried to address another anomaly by prescribing a decision based on ‘voting’ as against the existing system of ‘present and voting’. An event wise timeline for disposal of assets has been prescribed along with setting up of a dedicated portal to facilitate the sale process.

Overall, the above changes are much welcome and will no doubt pave way to faster and a more structured resolution and realization of assets.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our author:

Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.