Centre’s proposals should strengthen insolvency code

(i) The Ministry of Corporate Affairs has proposed to make admission of a case “almost automatic” by relying on records of information utilities to determine “default”, making it mandatory for the National Company Law Tribunal (NCLT) to admit a petition where it has been instituted. While this will reduce the delay, safeguards must be incorporated for recording defaults by information utilities.

(ii) The pre-packs introduced during the peak of the COVID pandemic for Micro, Small and Medium Enterprises were not utilised. The pre-packaged framework will be expanded to include additional categories of companies while reducing the approval threshold for introduction of unrelated financial creditors to 51% from the existing 66%. The fast-track process for scheduled companies is being fine-tuned, so that the NCLT can be involved only for final approval of the resolution plan (or free-standing moratorium, if needed). There are checks and balances outside the NCLT to make the fast-track process robust and speedy. This will bring the resolution option under IBC closer to established pre-packaged regimes globally.

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(iii) Companies with diverse asset classes have historically faced difficulties in attracting resolution applicants. The Committee of Creditors (CoC) can now invite asset-specific resolution plans to proceed in phases. Mechanisms have been proposed for cases involving interdependent assets necessary for business continuity, such as pooling of assets of companies, and guarantors and a long-awaited group insolvency process. The “clean slate” principle, a basic requirement for resolution applicants, is proposed to be reinforced by barring the government or statutory authorities from initiating legal proceedings for claims relating to the period prior to the Corporate Insolvency Resolution Process (CIRP). Continuation of existing arrangements or licenses issued by government authorities after approval of the resolution plan will achieve the twin objectives of improving the confidence of bidders to continue with the company and maximize the value of its economic assets.

(iv) Mandating the use of the Swiss challenge mechanism or inter-se bidding would provide certainty to bidders and help ensure that stakeholders realize the best possible value from the process. However, the CoC may require some discretion to specify the outline of challenge procedures as they see fit.

(v) Disruptive effect of Indian Supreme Court judgment rainbow papers sought to be neutralized by a resolution that all debts owed to government authorities would be treated at par with unsecured creditors, making first charge notwithstanding statutory provisions, except in cases where security interest has been created in favor of the government and A “transaction” between borrowers.

(vi) Once the operational creditors are brought at par with the unsecured financial creditors, their recoverability will improve.

(vii) Offering relief to certain home buyers, if insolvency is initiated against the promoter of a real estate project, the CIRP provisions at the discretion of the NCLT will apply only to projects that have defaulted. It will be able to differentiate viable and distressed projects and contain the problem. Allottees can be assigned completed projects with the consent of the CoC.

(viii) The distribution proposal of the government demands more debate. It proposes that creditors receive proceeds up to the liquidation value of the company based on the existing waterfall mechanism used for liquidation under section 53 of the IBC. All the surplus will then be distributed among all the creditors on the basis of the proportion of their unsatisfied claims. Although well-intentioned, this proposal deviates from an accepted order of priority of credit fundamentals and security interests. This has been considered for complex conglomerate structures and layered lending where multiple companies operate as a single economic entity. Applying it to standalone firms may reduce the availability of credit. One solution could be to give the CoC or government discretion to implement the proposed delivery tool in cases of public interest. In all other cases, the payment plan should be in accordance with the extant Section 53, which clearly gives priority to secured creditors as established principles of credit demand.

Overall, the proposals testify to the government’s awareness of IBC problems that need reform. The proposals preserve the creditor-in-possession model as the basis of the IBC, but make the framework more robust and negate the impact of judicial decisions Vidarbha Industries And rainbow papers Which shook the foundation of IBC. Given that significant discretion is proposed to be conferred on the NCLT, the government will now have to focus on strengthening its infrastructure and helping it discharge its functions effectively.

L Viswanathan and Madhav Kanoria are partners, Cyril Amarchand Mangaldas.

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