IBBI Releases Discussion Paper on ‘Streamlining Processes Under The Code: Reforms for Enhanced Efficiency And Outcomes’

The recent discussion paper of the Insolvency and Bankruptcy Board of India (IBBI) proposes some key amendments with the aim to enhance efficiency, transparency, and effectiveness of the Corporate Insolvency Resolution Process (CIRP) and liquidation processes while providing clarity on various operational aspects, as discussed briefly hereinbelow:

 

1. Review of expenditure on operational expenses including leased properties, and essential services by Committee of Creditors (CoC)

• • Issue: The accumulation of unnecessary costs, particularly for leased properties, can strain a corporate debtor’s resources, reducing the value available for creditors and prolonging CIRP.
    Moreover, it has been observed that the protection of moratorium is being incorrectly applied to essential services even when they are being used as a direct input for production or supply by a corporate debtor.

 

• • Proposal: IBBI has proposed to strengthen the CoC’s decision making process by mandating review of operational expenses regularly, with Resolution Professionals (RPs) submitting assessments within 30 days of the CoC formation and quarterly thereafter. Where the CoC determines that certain leased properties are not essential for the CIRP, the RP may surrender such properties to prevent unnecessary cost accumulation.
    With respect to the 2^nd issue above, IBBI has proposed addition of certain illustrations in Regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) that better demonstrate the distinction between essential and non-essential services during CIRP.

 

2. Coordinated Insolvency Resolution for Interconnected Entities

• • Issue: Interconnected entities, such as those involved in complex corporate structures, often face separate CIRPs, leading to delays due to overlapping issues like shared assets or liabilities. This can increase legal and operational costs, reducing efficiency.

 

• • Proposal: IBBI has proposed introduction of a mechanism for coordination of CIRP of interconnected entities. These include joint hearings, common RPs, information sharing protocols, and coordinated timelines. This could reduce costs and ultimately improve outcomes for creditors by ensuring a holistic approach.

 

3. Presentation of all Resolution Plans before the CoC

• • Issue: Section 25(2)(i) and Section 30(3) of the IBC, and Regulation 39(2) of the CIRP Regulations provide for presentation of resolution plans before the CoC. Non-compliant resolution plans are, however, sometimes not presented to the CoC, limiting transparency and potentially excluding viable options.

 

• • Proposal: IBBI has proposed to amend the CIRP Regulations to mandate the RPs to present all resolution plans received to the CoC, regardless of their compliance status. Presenting all plans with detailed compliance reports would ensure that the CoC has a comprehensive view, enhancing transparency and enabling informed decisions. This could lead to better resolution plans, reducing litigation and improving outcomes for stakeholders.

 

4. Mandatory Submission of Statement of Affairs by Corporate Debtors

• • Issue: One of the major challenges faced by RPs is the absence of readily available and comprehensive information about the corporate debtor at the start of the CIRP. This information gap often results in delays in the resolution process, creates information asymmetry, increases the risk of asset dissipation, and hinders efficient decision-making by the CoC and potential resolution applicants.

 

• • Proposal: IBBI has proposed to mandate submission of a Statement of Affairs by the corporate debtor specifically along with its reply to the applications filed by financial institutions under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). This Statement of Affairs will include copies of the financial statements for the last three years, a brief overview of employee/workmen details, and information about where and under whose custody the books of accounts and records are maintained.

 

5. Reliefs and Concessions subsequent to approval of Resolution Plan

• • Issue: Resolution applicants often seek additional relief, concessions, or modifications to the approved resolution plan after it has been approved by the Adjudicating Authority. Such post-approval modifications can introduce uncertainty, delay implementation, and erode value, as stakeholders may seek changes that disrupt timelines.

 

• • Proposal: IBBI has proposed amending the CIRP Regulations to explicitly state that no modifications can be sought once a resolution plan is approved under Section 31 of the IBC. All conditions must be built into the resolution plan before its approval.

 

6. Incentivizing Interim Finance Providers

• • Issue: Information asymmetry discourages interim finance, as providers lack visibility into CoC meetings, risking debtor viability during CIRP. This can lead to operational shutdowns, reducing recovery potential.

 

• • Proposal: To attract interim financing, IBBI has proposed to amend the CIRP regulations to empower the CoC to decide on inviting interim finance providers to attend CoC meetings as observers, with no voting rights. This could reduce asymmetry, encouraging funding critical for maintaining operations.

 

7. Disclosure and Treatment of Avoidance Transactions

• • Issue: The current regulatory framework for avoidance transactions lacks comprehensive disclosure requirements, leading to reduced transparency and information asymmetry. Prospective resolution applicants often do not have access to complete information about avoidance transactions before submitting their plans.

 

• • Proposal: To strengthen the regulatory framework for avoidance transactions, IBBI has proposed to amend the CIRP Regulations to mandate detailed disclosure of identified avoidance transactions, properly disclosed transactions, and undisclosed transactions in the Information Memorandum.

 

8. Request for resolution plans for part wise resolution of Corporate Debtor

• • Issue: The current regulatory framework under Regulation 36B(6A) of the CIRP Regulations mandates a sequential approach where RPs can invite resolution plans for the sale of assets only after failing to receive plans for the entire corporate debtor. This sequential requirement may lead to extended CIRP timelines and value erosion.

 

• • Proposal: To address these challenges, IBBI has proposed to amend Regulation 36B to allow RPs, with CoC approval, to invite resolution plans concurrently for both the corporate debtor as a whole and for specific businesses or assets of the corporate debtor.

 

9. Empowering CoC for Expedited Implementation of Resolution Plans

• • Issue: Resolution Applicants have been raising concerns about value erosion during the period between the submission of resolution plans and their final approval by the Adjudicating Authority. Delays and uncertainties force Resolution Applicants to adopt a conservative approach, leading to lower bids for distressed assets.

 

• • Proposal: To enhance the effectiveness of the resolution process, IBBI has proposed to amend the CIRP Regulations to empower the CoC to request the Adjudicating Authority for a two-stage approval process of resolution plans where the financial bid and basic implementation framework may be approved early. This would enable the Resolution Applicants to take over the corporate debtor and proceed with plan implementation early, while subsequent hearings at Adjudicating Authority could address inter-creditor disputes and other related aspects.

 

10. Non-receipt of Repayment Plan under Insolvency Resolution of Personal Guarantor

• • Issue: There is ambiguity in the procedural pathway when an application is admitted by the Adjudicating Authority under Section 100, but no repayment plan is prepared by the debtor. This may create a procedural vacuum, impacting the efficiency and effectiveness of the bankruptcy resolution process.

 

• • Proposal: IBBI has proposed amendment to the IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, to mandate the RP to submit a report to the Adjudicating Authority, notifying it of the non-submission of a resolution plan. Based on this report, the Adjudicating Authority may terminate the insolvency resolution process for the Personal Guarantor, enabling the debtor or creditor to file an application for bankruptcy.

 

11. Sale of Corporate Debtor as a going concern

• • Issue: The sale of the corporate debtor as a going concern during the liquidation process has led to lower recoveries and prolonged delays. Creditors recovered only 2.4% through going concern sales, compared to 3.7% via regular dissolution. Additionally, maintaining the corporate debtor as a going concern during liquidation has led to increased costs.

 

• • Proposal: To address these issues, IBBI has proposed to omit the provisions relating to the sale of the corporate debtor as a going concern in IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations). This change aims to streamline the liquidation process, reduce legal uncertainties, and potentially lead to faster resolution of cases.

 

This discussion paper represents a significant step toward streamlining insolvency and liquidation proceedings under the IBC. Creditors stand to gain from improved recoveries, reduced delays, and enhanced transparency, while debtors benefit from streamlined processes and quicker resolutions. The focus on coordinated resolution for interconnected entities and incentivizing interim finance addresses practical challenges, ensuring a balanced approach. Overall, these reforms foster a more efficient and transparent insolvency framework, aligning with the IBC’s objectives.