Expedite CIRP process, operationalize Insolvency and Bankruptcy Fund: Insolvency Law Committee

The Insolvency Law Committee, set up by the Union Ministry of Corporate Affairs (MCA), has come out with a report suggesting measures to improve the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC)..The fourteen-member Committee chaired by MCA Secretary Rajesh Verma also comprises Shardul Amarchand Mangaldas Managing Partner Shardul Shroff and AZB & Partners Founder and Senior Partner Bahram Vakil from the legal fraternity..The objective of the Committee was to monitor the progress and implementation of the IBC with due consideration to the difficulties faced by various stakeholders, identify gaps and bottlenecks, and recommend corrective measures for optimal functioning of the Code..In its 5th Report, the Committee has given major recommendations in respect of the CIRP and liquidation processes. The key recommendations are as follows:.1) Mandating reliance on information utilities (IUs) for establishing default.The Committee has recommended that it should be mandatory for financial creditors to submit IU records along with their CIRP application, and that the Adjudicating Authority (AA) should only accept CIRP applications submitted with IU records. This recommendation has been made to address the delays in the admission stage of CIRP. “Reliance on IU records has the potential of expediting the process of proving default, and may thus, avoid delays in admission of CIRP applications,” states the report..2) Continuation of proceedings for avoidable transactions and improper trading after CIRP.As per comments of stakeholders received by the Committee, there is lack of clarity on whether proceedings for avoidable transactions and improper trading can continue after the completion of CIRP.Sections 43-51, 66, and 67 of the Code lay down various transactions that may be avoided by the resolution professional or liquidator (collectively referred to as “avoidable transactions”), and the actions that can be taken against the erstwhile management for fraudulently or wrongfully trading in insolvency (referred to as “improper trading”).The Committee has stated that the continuation of such proceedings is permitted by Section 26 of the Code and has recommended that a clarificatory amendment may be made to this provision to avoid any doubts in this regard.In addition, the Committee has recommended for suitable amendments to the Code to ensure that the resolution plan provides sufficient clarity for the smooth conduct of proceedings for avoidable transactions or improper trading..3) Change in threshold date for look-back period.“The threshold date for the look-back period of avoidable transactions should be altered to cast a wider net for catching such transactions,” the Committee recommended.The provisions on avoidable transactions in the Code provide certain look-back periods or suspect periods. For instance, in case of preferential transactions, Section 43(4) provides for a two-year look-back period from the insolvency commencement date for related parties and one-year look-back period for unrelated parties. The threshold for such look-back period is the date of commencement of the CIRP.The Committee recommended that the threshold date should be changed to the date of the filing of application for initiation of CIRP instead of the date of commencement of CIRP. It was also suggested that transactions from the date of filing until the date of commencement of CIRP should also be included in the look-back period. This may not only help increase the scope of avoidable transactions, but will also discourage corporate debtors from delaying the admission of CIRP applications..4) Curbing submission of unsolicited resolution plans and revisions of resolution plans.Making note of the divergent practices regarding the timeline and manner of submission of resolution plans, the Committee has recommended that a mechanism be introduced for reviewing late submissions and unsolicited revisions to plans in the regulations. Pursuant to the recommendations of the Committee in this regard, some amendments have already been carried out in the CIRP regulations..5) Timeline for approval or rejection of resolution plan.To address delays in the disposal of resolution plans that are submitted to the AA, the Committee has recommended that the AA should dispose of the resolution plan within 30 days of receiving it, failing which, the AA should record reasons in writing for not adhering to the timeline.Such delays occur due to a high number of objections to the proposed resolution plan, or due to a high degree of pendency of cases, the report noted..6) Standard of conduct of Committee of Creditors (CoC).The CoC under the Code has been entrusted with wide powers such as making key decisions during the CIRP, including the manner of resolving the corporate debtor’s distress.Any improper conduct by members of the CoC impacts the life of the corporate debtor, and consequently its stakeholders. Hence, the Committee has recommended that the Insolvency and Bankruptcy Board of India (IBBI) should issue guidelines that provide the standard of conduct for members of the CoC..7) Stakeholders Consultation Committee (SCC).Given the pivotal role played by the SCC in the liquidation process, the Committee has recommended that the liquidator must mandatorily consult the SCC. Consequently, Section 35(2) of the Code and regulations ought to be suitably amended, the report suggests..8) Secured Creditor’s Contribution.As per the laws in force, secured creditors can step out of the liquidation process by choosing to realise their security interest outside, instead of relinquishing it on condition to contribute towards CIRP costs. The Committee, in furtherance to the same, has made recommendations that such creditors should also be required to contribute towards workmen’s dues in the same manner as they would have if they had relinquished their security interest.Workmen are key stakeholders of the corporate debtor and form the backbone of efforts to preserve the business of the corporate debtor, both before and during insolvency proceedings, the report states..9) Voluntary Liquidation Process (VLP).Section 59 of the Code provides for VLP of corporate persons and lays down the procedural and substantive requirements for initiation and conduct of the VLP. While most sub-sections of Section 59 provide for the conditions and requirements of a VLP in relation to a ‘corporate person’, the text of sub-sections (3) to (5) primarily make reference only to a company.It was brought to the notice of the Committee that procedural safeguards for initiating a VLP in respect of LLPs should also be explicitly provided under the Code. The Committee concluded that Section 59 should apply to all kinds of corporate persons, including LLPs. In addition, it has recommended a simple mechanism to be put in place for terminating a VLP, which is akin to the mechanism for commencement of the process..10) Operationalizing the Insolvency and Bankruptcy Fund.“Section 224 may be suitably amended to empower the Central Government to prescribe a detailed framework for contributions to and utilization of the IBC Fund,” the Committee recommended. Section 224 of the Code provides for formation of the Insolvency and Bankruptcy Fund, or ‘IBC Fund’, for the purposes of insolvency resolution, liquidation and bankruptcy of persons under the Code..11) Appeals against orders passed under Section 220.Under the current scheme, the IBBI and its disciplinary committee have the power to pass various orders under Section 220 pursuant to disciplinary proceedings. The Committee has called for an appeal mechanism under this process. Such appeals, it was suggested, may be filed before the National Company Law Appellate Tribunal (NCLAT)..[Read the Report]