Recently the IBBI has brought out a Discussion Paper (November 1, 2023) on the proposed changes in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Process) Regulations, 2016 (CIRP Regulations). CIRP is guided by principles of transparency, maximization of value, and fair treatment of all stakeholders involved. The idea is to make the IRP Resolution process faster, more objective, and effective. Proposed amendments in CIRP regulations aim to streamline the resolutions and prevent delay in the implementation of the resolution plan.
Approval Of CoC for Insolvency Resolution Process Cost
It is crucial to maintain a Corporate Debtor as a ‘going concern’ during the CIRP for preserving its intrinsic value, ensuring its operational continuity, and securing better returns for the creditors. The Insolvency and Bankruptcy Code, 2016 (Code) already provides that this going concern cost shall be part of the insolvency resolution process cost. Regulation 34 of the CIRP Regulations also states that “The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs.”
As per the proposed changes now there is going to be an explicit provision that the Resolution Professional will have to take approval of Committee of Creditors (CoC) for all the insolvency resolution process cost incurred by him including costs incurred in running the business of the Corporate Debtor as a going concern. A new regulation is proposed to be inserted below regulation 31A of CIRP Regulations as regulation 31B in this respect.
Monitoring the gaps between two consecutive CoC meetings
The CIRP is conceived to be a swift and time-efficient mechanism, ideally designed to be accomplished within 180 days to ensure timely resolution, minimizing disruptions and potential value degradation of Corporate Debtor. However, substantial gaps in two consecutive meetings of CoC have been observed in some CIRP cases even exceeding 180 days leading to delayed decisions or stalling the momentum of the resolution process.
One of the reasons could be the absence of approval items on the agenda due to which CoC meetings tend to be deferred or delayed. The proposed amendments are aimed to fix the ad hoc scheduling system of CoC meetings by making it compulsory for the Resolution Professional to conduct the meetings of CoC every month.
Accordingly, Regulation 18(1) of CIRP Regulations shall be amended whereby ‘A resolution professional may convene a meeting of the committee as and when he considers necessary and not more than thirty days should elapse between the date of one meeting and that of the next meeting.’
Discussion of valuation methodology and report with CoC
The current CIRP Regulations specify that the valuation report be disseminated to the CoC only after the reception of resolution plans and at times, CoC members raise objections regarding the methodology employed for valuation. Hence it is proposed that the valuers shall explain the valuation methodology to the CoC members in a meeting facilitated by the Resolution Professional (RP).
Accordingly, Sub-regulation (1)(a) of Regulation 35 of CIRP Regulations is proposed to be amended providing that the two registered valuers appointed under regulation 27 shall submit to the resolution professional an estimate of the fair value and of the liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor and that the registered valuer shall explain the valuation methodology to members of the committee in a meeting facilitated by the resolution professional before computation of estimates.
Disclosure of fair value in the Information Memorandum
One of the pillars of this process is the valuation of the Corporate Debtor (CD), which is used to inform the CoC about the underlying value of the company, aiding in the decision-making process. Currently, valuation reports are only disseminated to the members of CoC which creates an information asymmetry and may dissuade resolution applicants to participate due to an apprehension that some other resolution applicants may have better information on fair value.
However, if all resolution applicants operate with the same set of information regarding fair value estimate, it will help fostering trust and encouraging participation which in turn could help resolution applicants gain better insights into the CD’s worth, and facilitate more accurate and competitive bid formulations eventually leading to more viable and better valued resolution plans.
Accordingly, the existing Regulation 36 (2) of the CIRP Regulations is proposed to be amended to include ‘fair value’ in the information memorandum (IM) itself. IM serves as a comprehensive document conveying significant information about the corporate debtor including its operations, financial statements, to the prospective resolution applicant.
Continuation of process activities pending disposal of extension application by the AA
Section 12(2) of the Code provides for the RP to file an application to the Adjudicating Authority (AA) to extend the period of the CIRP beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six percent of the voting shares. Further, Section 12(3) of the Code confers the powers to the AA also for passing the order for extension of the CIRP pursuant to the application filed by RP.
However, there may be situations when a RP has filed application seeking the extension of the CIRP before the AA, but the order has not yet been received, and this lack of clarity results in the process getting stranded in the interim period. It is therefore proposed to be clarified in the CIRP regulations itself that the resolution professional shall continue to discharge his responsibilities under the corporate insolvency resolution process, for the period when the application seeking extension of the corporate insolvency resolution process is filed by the resolution professional till the application for extension is decided by the Adjudicating Authority
Clarity in minimum entitlement to dissenting financial creditors:
As per the existing provisions about the minimum entitlement of the dissenting financial creditors are such that the payment of debts of financial creditors, who do not vote in favor of the resolution plan, specified by the Board, shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.
However, the term “liquidation value” as described in the CIRP Regulations represents a notional amount, determined at the start of the insolvency proceedings. Therefore, realizable amount in the event of liquidation would be invariably lesser than the value arrived using liquidation value as there would be loss of value during the CIRP.
In such a scenario, the dissenting financial creditors gets higher entitlement than due. It may extend to a situation where the resolution value is lesser than the liquidation value, which is dated, and the financial creditors would be nudged towards dissenting against a resolution plan as it may be economically more lucrative. It is also against the interest of such dissenting creditors, as their entitlement then is determined by actual realization after liquidation.
Thus, there is a need felt for aligning the incentives of the stakeholders to the actual value remaining of the CD and to the objectives of the Code. It is proposed to include the definition of ‘amount due in the event of liquidation’ as being “lower of the (i) amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53; or (ii) the liquidation value as defined under these regulations been distributed in accordance with the order of priority in sub-section (1) of section 53.”
Further, under regulation 38(1) (b) of the CIRP Regulations, 2016 the dissenting financial creditors shall be paid in priority over financial creditors who voted in favor of the plan. However, stakeholders have expressed difficulty in determining the extent of what ‘payment in priority’ means in terms of regulation 38 of CIRP Regulations. Hence, it is proposed to issue a clarification to this effect which states that “The amount payable under a resolution plan to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favor of the resolution plan, shall be paid amount due in the event of liquidation in priority over financial creditors who voted in favor of the plan.”
Mandatory contents of resolution plan
Regulation 38 of CIRP Regulations deals with the provisions pertaining to mandatory contents of a resolution plan such as amount payable, statement dealing with interest of stakeholders, details of resolution applicant, term of plan, provisions for implementation, manner of proceedings in respect of avoidance transactions etc. Apart from the same, the regulation stipulates that a plan must demonstrate feasibility and viability, addressing the cause of default, effective implementation, capacity of resolution applicant etc.
However, at times, the resolution plan does not get approved due to severe litigation w.r.t. the amount of distribution of proceeds of the resolution plan to the stakeholders, and so the effective implementation of resolution plan and takeover by resolution applicant gets hampered and the entire CIR process gets derailed.
It is therefore proposed that the resolution plan may be structured in two parts. Part A of the resolution plan shall deal with the inflow i.e., payment under the resolution plan (total value of the resolution plan), payment of insolvency resolution process cost, payment schedule, feasibility, and viability of the resolution plan etc. while Part B will deal with distribution to the various stakeholders.
Structuring the resolution plan in two parts will enable AA to first approve the resolution plan effectuating control by the resolution applicant so that inflow can take place and CD may start functioning again. The second part shall deal distribution amongst the various stakeholders. In case of any dispute or litigation, the disputed amount may be kept in an escrow account and be distributed after the litigation in respect of distribution attains finality.
Part A of the resolution plan
- the total realizable value being provided under the resolution plan;
- the payments to be made for insolvency resolution process costs;
- the term of the plan and its implementation schedule;
- the management and control of the business of the corporate debtor during its term;
- the detailed overview and experience of the resolution applicant;
- the sources of fund and its utilization;
- a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past;
- adequate means for supervising its implementation including provision for deposit in an escrow account, if any, of the amount for which there is dispute about the amount to be paid to a creditor or stakeholder out of the amounts provided in the applicable regulations;
- provides for the manner in which proceedings in respect of avoidance transactions, if any, under Chapter III or fraudulent or wrongful trading under Chapter VI of Part II of the Code, will be pursued after the approval of the resolution plan and the manner in which the proceeds, if any, from such proceedings shall be distributed;
- a resolution plan shall demonstrate that –
- it addresses the cause of default;
- it is feasible and viable;
- it has provisions for its effective implementation;
- it has provisions for approvals required and the timeline for the same; and
- the resolution applicant has the capability to implement the resolution plan.
Part B of the resolution plan
- a statement as to how it has dealt with the interests of all stakeholders, including
- financial creditors and operational creditors, of the corporate debtor;
- the payments to be made to each category of creditor and other stakeholders against their admitted claims;
- the amount payable to the operational creditors shall be paid in priority over financial creditors; and
- the amount payable to the financial creditors, who have a right to vote under subsection (2) of section 21 and did not vote in favor of the resolution plan, shall be paid in priority over financial creditors who voted in favor of the plan.
Provided that the committee shall recommend whether a resolution plan so prepared shall have provisions for separate approval of Part A and Part B by the Adjudicating Authority.
To conclude, the proposed amendments are aimed at streamlining Insolvency Resolution Process making it faster, more objective, and effective. The Board accordingly has sought comments on the proposals discussed above electronically by 22nd November, 2023 at the ‘Public Comments’ Link at the IBBI website, www.ibbi.gov.in.