[By Biprojeet Talapatra]
The author is a student of Campus Law Centre, University of Delhi.
Introduction
Economic stability and prosperity in India require an effective insolvency resolution framework. With the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India took a significant step in this direction. IBC was the first comprehensive law in India which addressed the insolvency of Corporate Persons and individuals. However, a law must be restructured over time to keep up with the times, therefore in 2019, rules for insolvency resolution and liquidation for individual insolvency were made applicable to personal guarantors (“PG”) to corporate persons. Following that, a distinct framework for pre-packaged insolvency resolution for micro, small, and medium-sized enterprises (“MSMEs”) was launched in April 2021.
The Ministry of Corporate Affairs (MCA) has recently released a consultation paper outlining proposed changes to the Insolvency and Bankruptcy Code, 2016. The purpose of these changes is to improve transparency, reduce delays, and ensure efficient decision-making in insolvency proceedings. This article aims to highlight the key changes proposed in the paper.
Key changes proposed in the consultation paper
To simplify the insolvency procedure, the MCA advocated the implementation of an E-platform in Insolvency Proceedings.The MCA believes that implementing an e-platform for insolvency proceedings will lead to a more efficient case management system, automated mechanisms for filing applications with Adjudication Authorities (AAs), notice delivery, and allowing Insolvency Professionals (IPs) to interact with stakeholders, among other benefits. By unifying and making information widely accessible, the e-platform will enable improved supervision of regulators and adjudicating authorities.
The MCA advocates a greater dependence on data via Information Utilities (IUs), while also taking applications into account. Sections 7 and 9 of the code now provide that, in addition to the record of default kept by the IUs, further evidence can be provided to prove that a default has happened. It has now been recommended that the code should be revised to allow the Adjudicating Authority to solely consider the default record from the Information Utilities when reviewing applications under sections 7 and 9 of the Code.
Section 7 of the Code allows a financial creditor to apply for the commencement of the CIRP in relation to a Corporate Debtor (CD). The Supreme Court interpreted the usage of the word “may” in section 7(5) to mean that the Adjudicating Authority (hereinafter referred as AA) has the authority to accept or refuse the application despite the presence of a default. It is now recommended that an application submitted under Section 7 “shall” be allowed if a default is proved; the AA is only necessary to be satisfied regarding the existence of a default and the fulfilment of procedural requirements for this specific purpose (and nothing more). When a default is formed, the AA is required to allow the application and commence the CIRP.
The proposals aim to give more power to the adjudicating authority by allowing mandatory admission of insolvency applications filed by financial creditors (FCs). The draft proposal also proposes a specialized framework for real estate to provide relief to allottees, as well as to broaden the scope of the pre-packaged bankruptcy scheme beyond MSMEs. The ministry also proposed that the 14-day timeframe in section 7 be read to apply exclusively to the ascertainment of default. However, it is also meant to apply to the AA’s decision under section 7(5) to admit or reject the application. As a result, it is proposed that a suitable adjustment be made to clarify the timeline’s application.
The MCA has proposed removing the Corporate Debtor’s right to designate an Insolvency Resolution Professional (IRP). The draft proposal recommends that the IRP be appointed by the Adjudicating Authority (AA) based on the IBBI’s recommendations. As a result, this proposal seeks to limit the CD’s ability to propose an IRP.
The AA is now planning to have the power to penalize people who file frivolous or vexatious applications or fail to comply with the terms of the Code or any rules or regulations imposed thereunder. Furthermore, the AA’s minimum punishment for the aforementioned violations should not be less than one lakh rupees per day, with the maximum penalty being three times the damage incurred or illicit gain, whichever is greater. To ensure that corporate debtor promoters comply with their obligations and to prevent them from committing repeated or significant violations, the MCA has considered amending Section 29A of the Code to allow the AA to bar such a promoter from being a resolution applicant and submitting a resolution plan in the CIRP of any CD.
During the liquidation process, Section 33 (5) of the Code prohibits the CD from instituting actions or legal processes against it without the permission of the AA. It does not, however, preclude the continuation of any ongoing action or legal procedure after the moratorium imposed during the CIRP is lifted. As a result, it is suggested that Section 33 (5) may be revised to restrict any legal procedures during liquidation, except for those authorized under Section 52. (i.e., Secured creditor in liquidation proceedings). To continue any legal processes involving a CD in liquidation, the AA’s consent should also be necessary.
Changes recommended in the requirements for the Pre-Packaged Insolvency Resolution Process
- The 66 per cent requirement for unrelated FCs might be reduced to 51 per cent. This will allow for faster and more efficient decision-making.
- The need under section 54C(3)(c) to provide a declaration involving avoidance transactions or unlawful trading is repealed. These transactions are difficult for MSMEs to recognise.
- Changes in management under section 54J, conversion to CIRP, or liquidation under sections 54O or 54N are to be deleted. The major goal of this suggested adjustment is to ensure that genuine CDs intending to address insolvency through this method are not affected.
Proposals for Streamlining the Insolvency Resolution Process
The Fast-Track Corporate Insolvency Resolution Process (“FIRP”) is being considered to allow FCs to lead the insolvency resolution procedure for a CD outside of the judicial process while keeping some involvement of the AA to increase the legal certainty of the conclusion. It is argued that the proposed framework may be especially useful in circumstances when FCs have seized direct or indirect control of the CD, allowing them to easily initiate the process.
As a result, it is being discussed that the FIRP rules be altered to ensure that unrelated FCs of a CD may pick and adopt a resolution plan through an informal out-of-court process, including the AA only for final approval (or a moratorium. Insolvency resolution will be possible through this method for CDs with the asset size specified by the Central Government. Furthermore, a resolution plan accepted through this approach will have the same sanctity as a conventional plan approved under the CIRP.
Conclusion
The proposed adjustments are a move in the right direction, reflecting the government’s consistent capacity to be aware of concerns influencing insolvency remedies and ensure course correction as needed. Proposed adjustments have been made to improve the transparency and efficiency of insolvency proceedings, optimize total production and guarantee a fair and efficient process for all parties concerned. Overall, the suggested modifications aim to establish a more efficient and effective system that achieves the greatest possible results for all parties involved.