Proposed Regulatory Framework To Curb The Problem Of Delays In CIRP

The Code also provides for the establishment of the Insolvency and Bankruptcy Board of India (“IBBI”). The IBBI has been entrusted with the “power to promote the development of and regulate, the working of, insolvency professionals, insolvency professional agencies and information utilities and other institutions, in furtherance of the objectives of IBC.” The Code has been continuously evolving through judicial precedents and amendments since it came into effect.

According to the data published by IBBI in its quarterly newsletter, there are 2000 ongoing Corporate Insolvency Resolution Process (“CIRP”) as of 31^st December 2022. The 32^nd Report of the Ministry of Corporate Affairs Standing Committee on Finance on the “Implementation of Insolvency and Bankruptcy Code-Pitfall and Solutions” stated that the average time for completion of CIRP is 1.6 times more than the statutory time frame of 330 days prescribed for completion of CIRP under Section 12 of IBC. This article aims to propose an effective and efficient regulatory framework to curb the delay problems in the CIRP.

Issues in the current status quo

Justice D.Y. Chandradchud highlighted the importance of adhering to the timelines prescribed for CIRP in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd. & Ors. by observing that “Section 12 of IBC mandates that all CIRP including legal proceedings, should be completed within a time period of 330 days. Further, it was also observed that if the Adjudicating Authority is allowed to extend the timelines while exercising its power under Section 60 (5) (c) it would be antithetical to the objectives of IBC”.

While the importance of adhering to the timelines cannot be denied, it is very important to find the main reason for delays in CIRP. The National Company Law Tribunal (“NCLT”) recently on 7^th March 2023, approved the resolution plan submitted by Suraksha Realty Limited along with Lakshadweep Investment and Finance Limited for the resolution of Jaypee Infra Limited. The CIRP took approximately 7 years since 9^th August 2017, when JIL was admitted into CIRP. Since then, JIL has faced several rounds of litigation above various judicial forums. Thus, one of the main reasons for delays in CIRP is litigation after the initiation of CIRP of the Corporate Debtor.

The main reason for litigation after the initiation of CIRP is the interpretation of the Code or the rules and regulations issued thereunder. For instance, in the case of Mr. Surinder Manchanda v. Nolsar Limited, NCLT, New Delhi interpreted Regulation 32A of IBBI (Liquidation Process) Regulations, 2016 and held that “even if Regulation 32A(4) provides that the assets of the Corporate Debtor shall be sold as a going concern exclusively at the first auction. There is no bar in selling the assets of the Corporate Debtor as going concern in the subsequent auctions, where the Liquidator has all other options of sale as stipulated under Regulation 32A of IBC.”

In addition to the above, it is also pertinent to note that Resolution Professionals (“RP”) have also faced disciplinary action from IBBI merely because they did not have clarity with respect to the interpretation of the Code or the rules and regulations. For instance, in the matter of Mr. Sanjit Kumar Nayak, IBBI had initiated Disciplinary Proceedings and held the RP liable inter alia on the ground for not filing an avoidance application before the NCLT. The RP had taken a defense that Section 25(2)(d) of IBC lacks clarity as it empowers the RP to appoint accountants, legal and other professionals in the manner specified by IBBI. There is no specific requirement to appoint a forensic or transaction auditor. Further, he contended that without the appointment of a forensic auditor, he could not form an opinion with respect to the avoidance transaction and file an application with the NCLT.

The IBBI in its order held that “Making efforts towards examination and determination of avoidance transaction is the duty of the resolution professional. Non-pursuance of the same stands contrary to the maxim of ‘value maximization’ as enshrined in the Code. Section 25(2)(d) and (j) of the Code clearly lays down the responsibility of the resolution professional in this regard. Therefore, an argument about lack of clarity in the statute or relevant regulations coming at a later date does not help.”

The underlying solution to the situation mentioned above and curbing the delays in CIRP because of the time taken by the judicial bodies to interpret the provisions of the Code is to take an example from other regulatory bodies such as the Securities Exchange Board of India (“SEBI”) and develop a framework like SEBI (Informal Guidance Scheme), 2003.

What is SEBI (Informal Guidance Scheme), 2003?

SEBI in the exercise of its power and functions under Section 11(1) of the SEBI Act, 1992 “in the interest of better regulation and orderly development of the securities,” introduced SEBI (Informal Guidance) Scheme, 2003. Under this framework, persons associated with the securities market can request interpretive letters after the payment of prescribed fees. In this scheme, interpretive letters have been defined to include requests made to SEBI for interpretation of the provisions of any act or regulations, or rules administered by SEBI in light of the factual position or a proposed transaction in securities. SEBI has to reply to the requests made under the scheme within a time frame of 60 days. Further, the persons who make such requests for interpretive letters can also request confidential treatment for the time frame of 90 days. After the expiry of 90 days, the interpretive letters are available on SEBI’s website.

Prefilling Consultation Framework– Competition Commission of India

Apart from SEBI, the Competition Commission of India (“CCI”) also has an informal guidance framework in the form of a Pre-Filing Consultation. The framework was introduced by CCI in furtherance of its duties prescribed under Section 18 of Competition Act, 2002 (“Competition Act) which interalia include “to protect and sustain competition in markets in India”. Under this framework, parties who enter into a combination can seek informal and verbal consultation from the staff and team members of CCI before filing a notice with CCI for its approval. The parties seeking Pre-Filing Consultation regarding the interpretation of Sections 5 and 6 of the Competition Act or the provisions of Combinations Regulations, can file a request for consultation along with relevant details regarding the proposed combination and seek consultation with respect to the following : (a) the scope and structure of the proposed transaction; (b) the sector/relevant market in which the market operates; (c) key issues regarding which the parties seek consultation; and (d) any other details which according to the parties may be pertinent for meaningful discussion.

Proposed Framework

As pointed out above that IBBI has also been entrusted with similar duties, powers and functions as SEBI and CCI to “promote the development and of insolvency professionals and other institutions in furtherance of the objectives of IBC.” Therefore, a similar informal guidance framework may be issued by IBBI. Under the proposed framework, the RP should be allowed to file an application with IBBI seeking an interpretation of the provision of the Code or the rules and regulations issued thereunder in light of the factual position. The application should be made after payment of the prescribed fees. The time frame to reply to such requests by IBBI should be fixed to 15 days from the date of application. Considering the statutory time frame of 330 days prescribed for completion of CIRP. Further, it is also suggested that the proposed framework should incorporate the confidentiality treatment for a fixed time frame as it may deem fit to IBBI. The confidentiality treatment will protect the commercial wisdom of Committee of Creditors as well as the commercially sensitive information of the Corporate Debtor.

The CIRP has existed for almost 7 years since 2016 when the Code came into force. The Code has been continuously evolving after it came into force, for instance, IBBI notified Insolvency for Personal Guarantors on 15^th November 2019 and Pre-Packaged Insolvency Process (“PIRP”) for Micro Small and Medium Enterprises by way of an ordinance on 21^st April 2021. In addition, to the above Central Government is also planning to introduce a bill in the monsoon session to bring amendments to the Code which inter alia include extending the PPIRP for bigger companies. Therefore, litigation with respect to the interpretation of the Code or the rules and regulations is going to increase. The introduction of a framework similar to SEBI (Informal) Guidance, 2003 is the need of the hour. Once the framework is implemented, it will reduce the scope of litigation over the interpretation of provisions of the Code which will result in curbing the delays in the resolution process. It will also reduce the burden on NCLT, leading to their efficient functioning.

Ravishekhar Pandey is a securities law practioner in Mumbai and Amarpal Singh Dua is a final year law student at School of Law, UPES Dehradun. Views are personal.