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Insolvency Law Amended To Enhance Scrutiny Of Resolution Applicants  

IBC regulations amended in an attempt to test credibility of the resolution applicant.

 (Photographer: Scott Eells/Bloomberg)
(Photographer: Scott Eells/Bloomberg)

Resolution professionals have now been tasked with additional responsibility under the Insolvency and Bankruptcy Code. The Insolvency and Bankruptcy Board of India amended its regulations on Wednesday to strengthen the due diligence on resolution applicants.

The changes include:

  • Resolution professionals will need to ensure that plans presented to the Committee of Creditors have relevant details on resolution applicants.
  • These details should pertain to convictions, disqualifications, criminal proceedings, willful defaulter status, debarment imposed by SEBI, and transaction, if any, with the distressed company in the last two years.
  • Resolution plans will also need to disclose details on persons who are promoters or in management or control of the resolution applicant, persons who will be promoters or in management or control of the business of the distressed company during the implementation of the resolution plan; and their holding companies, subsidiary companies, associate companies and related parties, if any.
“A resolution plan shall contain details of the resolution applicant and other connected persons to enable the committee to assess the credibility of such applicant and other connected persons to take a prudent decision while considering the resolution plan for its approval.”  

While the IBBI’s media statement mentions that the changes are also intended to test the “credit worthiness” of resolution applicants, the text of the amendments do not lay down any test related to this.

That notwithstanding the amendments have addressed two concerns under the insolvency process, Anshul Jain, a corporate law partner at Luthra & Luthra explained.

The first relates to the confusion lenders had on whether they should simply pick a plan that gives them best value or do they have a fiduciary duty to assess the credibility of resolution applicants.

The second relates to the possibility of promoters submitting resolution plans through front-end entities, for instance, special purpose vehicles or asset reconstruction companies or non-banking financial companies.

The amendments address both these issues. Resolution professionals will have to include details not just on the resolution applicants but connected persons as well. Interestingly, details on potential promoter in the implementation phase of the resolution plan also needs to be included. 
Anshul Jain, Partner, Luthra & Luthra

Additionally, resolution professionals will also need to include in the plans information on preferential, undervalued , extortionate credit and fraudulent transactions, if any, done by the company in the last 2-3 years.

So far, it was not mandatory for the resolution professional to report all such transactions when presenting the plans. Now it will be, says Jain.

Most resolution professionals weren’t doing any due diligence on such transactions. In the last 10 days, the IBBI has sent several show-cause notices to resolution professionals, especially those handling the big 12 accounts classified by the Reserve Bank of India. The regulator was asking resolution professionals to report to it any such transactions that they may have noticed. There were some who then questioned the regulator’s powers since the law didn’t cast any such responsibility on the resolution professionals.
Anshul Jain, Partner, Luthra & Luthra

With this amendment, the resolution professional will now have to actively investigate the existence of any such transactions, Jain added.