IBBI Amends Regulations Governing Corporate Insolvency Resolution Process

On 07 November 2017, the Insolvency and Bankruptcy Board of India (IBBI) amended: (A) The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and (B) The Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (Fast Track CIRP Regulations), issued under the Insolvency and Bankruptcy Code, 2016 (Code). The stated objective of the amendments is to ensure that the corporate insolvency resolution process of the debtor company (CIRP) leads to a "credible resolution plan that maximizes the value of assets of the corporate debtor".

Background

In the CIRP of a corporate debtor, any person can submit a resolution plan (for resolution of insolvency of the debtor) to the Resolution Professional (RP). The RP is statutorily mandated to examine the plans for compliance with minimum criteria and thereafter, submit all complying plans to the Committee of Creditors (COC) for approval. The minimum criteria are specified under Section 30(2) of the Code, which also empowers the IBBI to specify other requirements that the resolution plan must conform to. Regulation 38 of the CIRP Regulations (and Regulation 37 of Fast Track CIRP Regulations) stipulate such mandatory contents for the resolution plan.

The resolution plan that is approved by COC is to be submitted to the Adjudicating Authority (i.e. the National Company Law Tribunal) by the RP. The Adjudicating Authority, upon being satisfied that the COC approved resolution plan meets the requirements of Section 30(2) of the Code, is mandated to approve the resolution plan, which is then binding on all stakeholders.

The Amendments

(A) Details of Resolution Applicant:

The latest amendments have made it mandatory for the resolution applicant to provide certain 'details' of the resolution applicant and other 'connected persons' in the resolution plan submitted by it (Regulation 38 (3) of the CIRP Regulations and Regulation 37 (3) of the Fast Track CIRP Regulations).

The 'details' required to be provided in the resolution plan, in respect of the resolution applicant and other 'connected persons' are, details regarding identity, previous conviction (in the preceding five years) for any offence, pending criminal proceedings, disqualifications to act as director under the Companies Act, 2013, identification as a willful defaulter as per Reserve Bank of India guidelines, debarment from securities markets under any order/ direction of the Securities and Exchange Board of India and previous transactions (in the preceding two years) with the corporate debtor.
The expression 'connected persons' has been defined to mean (a) persons who are promoters or in the management or control of the resolution applicant; (b) persons who will be promoters or in the management or control of the business of the corporate debtor during the implementation of the resolution plan; (c) holding company, subsidiary company, associate company and related party of such persons in (a) and (b).

(B) Obligations of RP:

Regulation 39 (2) of the CIRP Regulations (and Regulation 38 (2) of Fast Track CIRP Regulations) has been substituted to provide that while submitting complying resolution plans to the COC, the RP is now obligated to provide details of preferential transactions (Section 43), undervalued transactions (Section 45), extortionate credit transactions (Section 50) and fraudulent transactions (Section 66) (collectively, "Avoidance Transactions"), that may be observed, found or determined by the RP along with the orders, if any, of the Adjudicating authority in respect of such transactions.

Analysis

This amendment is the third in a series of amendments that have been brought about to the CIRP Regulations with the aim of ensuring that CIRP results in a realistic and sustainable resolution plan that caters to all stakeholders. Thus, the first amendment (brought into force from 16 August 2017) enabled a new class of creditors (who are neither financial nor operational creditors) to file their claims upon commencement of CIRP, while the second amendment (which came into effect from 05 October 2017) introduced the requirement that a resolution plan must include a statement regarding how the interests of all stakeholders of the corporate debtor are being dealt with in the resolution plan.

By introducing a requirement to provide detailed disclosures of 'resolution applicant' (including its connected persons) – the third amendment seeks to establish the credibility of the resolution applicant. In light of such disclosures, the onus has been put on the COC to undertake due diligence of the resolution applicant by reviewing the information provided by the resolution applicant about itself and its connected persons, and satisfy themselves that the said applicant is 'suitable' for purpose of achieving the resolution of insolvency of the insolvent debtor. Notably, the amendment maintains status quo with respect to who can submit a resolution plan (and as earlier, any person, including promoters, can submit a resolution plan to the RP).

By requiring RP to provide details of Avoidance Transactions, the amendment also appears to reiterate and firmly establish the obligation of the RP to investigate the affairs of the corporate debtor and report any Avoidance Transactions to the COC.
Avoidance Transactions (also referred to as Antecedent Transactions) are specific types of transactions made prior to a corporate debtor's insolvency which can be reversed or set aside by the Adjudicating Authority upon application made by the resolution professional or liquidator, as the case may be. The underlying rationale is to protect the creditors from a diminution in asset value resulting from unfair and improper transactions, improve recoveries for creditors by widening the asset pool and ensure equality in distribution of assets.
Under the existing provisions of the Code, the RP (or the liquidator) can investigate and report Avoidance Transactions. For preferential transactions and undervalued transactions, the RP can look back one year from the insolvency commencement date (two years in case of transactions with related parties). In the event the RP detects such transactions, she is obligated to apply to the Adjudicating Authority for avoidance/reversal thereof. Notably, in case of non-reporting of undervalued transaction by the RP (despite having sufficient information or opportunity to avail such information), the Adjudicating Authority is mandated to direct initiation of disciplinary proceedings against the RP by IBBI.

While the RP is also required to report extortionate credit transactions (with look back period of two years from the insolvency commencement date) and fraudulent transactions (no look back period restriction), there appears to be some ambiguity with respect to the nature of RP's reporting obligation owing to variance in language used in the relevant provisions.

The provisions of the Code dealing with Avoidance Transactions should be read with Section 70(2) of the Code which provides for punishment for deliberate contravention of the Code by an RP and Section 233 of the Code which provides protection to actions taken by an RP in good faith.

It is clear that Avoidance Transactions can be voided/set aside only by an order of the Adjudicating Authority and not by the COC or RP herself. What then is the objective of mandating the RP to disclose all Avoidance Transactions observed, found or determined by her to COC, even in the absence of any corresponding order of the Adjudicating Authority? The objective perhaps is to make the RP's investigating and reporting obligations explicit and place it on a much higher pedestal than before. A necessary corollary of the RP's obligation to report such transactions to the COC is that the RP will also have to report negatively in the event no such transactions are found by her, which entails a higher onus being placed on the RP than earlier. Needless to add, the newly introduced reporting obligations will help to bring about greater transparency and accountability in the CIRP. Where promoters are involved in Avoidance Transactions, one question that arises is whether the newly introduced mandated disclosure by the RP to the COC would result in prejudicing the mind of the COC prematurely (against the promoters) if there is no order of the Adjudicating Authority on the transaction.

Notwithstanding the above, the latest amendments are indeed a remarkable step towards ushering in greater credibility in the insolvency resolution process.

Pooja Mahajan is the Managing Partner and Mahima Singh is an Associate at Chandhiok & Associates, Advocates and Solicitors