IBC Changes Proposed To Quicken Resolution Process, Protect Against Avoidable Transactions
More changes have been proposed to strengthen the Insolvency and Bankruptcy Code, 2016 by the Insolvency Law Committee. These include a swifter admission process, a time limit on acceptance of resolution plans, more stringent measures against avoidable transactions and wrongful trading, and a formal closure of the voluntary liquidation process.
The ILC was constituted in November 2017, by the central government. It has since issued four reports on the basis of which the ministry has recommended changes to the IBC.
The new proposed changes are open to public comments till Jan. 13.
Here are the key changes proposed:
Information Utilities' Records To Establish Default
Though insolvency courts are required to dispose of applications initiated under corporate insolvency resolution process within the prescribed 14 days, such admission or rejection sometimes takes longer. With a view to fix this delay, the ILC has recommended that to establish a corporate debtor's default, financial creditors should submit only records authenticated by information utilities.
This is because, as per the RBI's mandate, banks and financial institutions already submit financial information to information utilities. So, the ILC's view is that making use of this data may expedite the disposal of admission applications.
This will also dissuade adjudicating authorities from taking time to determine ancillary matters such as the amount of default and allow them to speedily admit Section 7 corporate insolvency resolution process applications on the basis of IU authenticated records evidencing the existence of default.ILC Recommendations
If these records are not available, then the current option of relying on different documents for establishing default can remain, added the ILC.
Avoidable Transactions And Wrongful Trading
Since there has been confusion regarding whether proceedings for avoidance of transactions and wrongful trading can continue after the approval of a resolution plan, the committee has proposed to add a clarification in the code informing that such proceedings can continue.
The ILC has also recommended for the following details to be included in resolution plans:
Who would pursue such proceedings after the approval of the plan.
The manner of distribution of expected recoveries from proceedings.
Under the code, the provisions on avoidable transactions contain certain look-back periods. Currently, the threshold for such look-back periods is from the date of commencement of the corporate insolvency resolution process.
"Such pre-filing transactions may not be sufficiently captured in the look-back period in cases where the admission of an application is delayed," the ILC report states.
This may also give corporate debtors a perverse incentive to delay admission of resolution process so as to reduce the scope of avoidable transactions, the committee notes.
Hence, it has proposed to change this threshold to the date of filing of the application. This is to ensure the period between the date of filing and the date of commencement of CIRP can be included in the suspect period for such transactions.
Time For Approval Of Resolution Plans
In line with the law laid down by the Supreme Court, the ILC too opined that the approval of resolution plans that are already approved by the creditors' committee should not be inordinately delayed.
It has recommended to provide the company law tribunal 30 days for approval or rejection of a resolution plan.
In case there is a delay in disposing of a plan, then the tribunal should record reasons for the delay, the ILC has proposed.
Closure Of Voluntary Liquidation Process
In cases of voluntary liquidation, there is no provision in law for a midway closure of the process.
For instance, business opportunities that can make the corporate person profitable or viable may arise after the initiation of a voluntary liquidation process. Given this, closure of the process has been ordered by the Adjudicating Authority in a few instances.ILC Recommendations
But the intervention of a tribunal may not be necessary in a voluntary process. So, the ILC has proposed that corporate entities can carry out the closure of the insolvency process by way of a special resolution or members’ resolution and approval of creditors representing two-thirds in value of the corporate debtor's debt.
If such approvals are given, the liquidator will have to make a public announcement about the closure of the process. And, also inform the Insolvency and Bankruptcy Board of India and the registrar of companies.
This apart, the ILC has sought a detailed framework regarding contribution and utilisation of the IBC fund. This proposal was made as ILC felt that the current design of the IBC fund does not incentivise contributions to the fund and also, the law provides very limited ways of utilising it.