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The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 was a ‘watershed’ moment in India, its success aided by swift legislative interventions by the government to ensure that the code evolved to address legal and practical challenges in its implementation. The latest proposals by the ministry of corporate affairs advance the same philosophy, with sweeping changes being suggested.

(i) The ministry of corporate affairs proposes to make the admission of a case “near 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 that has been established. While this will reduce delays, safeguards should be incorporated for recording of a default by Information Utilities.

(ii) Pre-packs introduced during the covid pandemic’s peak for micro, small and medium enterprises were not used. The pre-pack framework will now be expanded to include additional categories of companies whilst reducing the approval threshold for initiation from the current 66% to 51% of unrelated financial creditors. The fast-track process for prescribed companies is being fine-tuned, so that the NCLT will be involved only for final approval of a resolution plan (or a free-standing moratorium if needed). The fast-track process has checks and balances outside the NCLT to make it robust and swift. This will take resolution options under the IBC closer to established pre-pack regimes globally.

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(iii) Companies with diverse classes of assets have historically faced difficulties in attracting resolution applicants. The Committee of Creditors (CoC) can now invite asset-specific resolution plans to move ahead in stages. Mechanisms have been proposed for cases involving inter-dependent assets required for business continuity, such as pooling of assets of companies, and guarantors and a long-awaited group insolvency procedure. The “clean slate" principle, a basic requirement for resolution applicants, is proposed to be reinforced by prohibiting government or statutory authorities from initiating legal proceedings for claims related to the period before the corporate insolvency resolution process (CIRP). The continuation of subsistent arrangements or licences issued by government authorities after the approval of a resolution plan will achieve the dual purpose of keeping the company a going concern and improving bidder confidence to maximize the value of its economic assets.

(iv) Mandating the use of a Swiss challenge mechanism or inter-se bidding will offer certainty to bidders and help ensure that stakeholders realize the best possible value from the process. However, the CoC may need some discretion to specify the contours of the challenge processes as they see fit.

(v) The disruptive effect of the Indian Supreme Court’s ruling in Rainbow Papers is sought to be neutralized by a proposal that all debts owed to government authorities will be treated at par with unsecured creditors, irrespective of statutory provisions creating a first charge, except in cases where a security interest has been created in favour of the government pursuant to a “transaction" between it and the borrower.

(vi) Recovery for operational creditors will improve once they are brought at par with unsecured financial creditors.

(vii) Offering some homebuyers relief, if insolvency is initiated against the promoter of a real-estate project, then CIRP provisions will apply only to such projects which have defaulted, at the discretion of the NCLT. This will enable segregation of viable and distressed projects and contain the problem. Allottees can be handed over completed projects with the CoC’s consent.

(viii) The government’s distribution proposal calls for 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 of the surplus will then be distributed among all creditors based on a ratio of their unsatisfied claims. While well-intentioned, this proposal deviates from credit fundamentals and a well-accepted order of priority of security interests. It has been considered for complex group structures and layered borrowings where multiple companies operated as a single economic unit. Applying it to standalone firms may deter the availability of credit. One solution could be to give the CoC or government discretion over applying the proposed distribution device in cases involving public interest. In all other cases, the payout scheme should be as per the existing Section 53, which clearly gives secured creditors priority, as established principles of credit demand.

On the whole, the proposals bear testimony to the government’s awareness of IBC problems that warrant course correction. The proposals preserve the creditor-in-possession model as the IBC’s fulcrum, but make the framework more robust and negate the impact of judicial rulings in Vidarbha Industries and Rainbow Papers which shook the substratum of the IBC. Considering that significant discretion is proposed to be granted to the NCLT, the government will now have to focus on strengthening its infrastructure and help it discharge its functions effectively.

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

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