The amendments vide Insolvency and Bankruptcy Code (Amendment) Bill 2022 to the Insolvency and Bankruptcy Code (IBC), which came into force in 2016 for timely resolution of stressed assets, are expected to be introduced in the Budget session of Parliament early next year.
The central government is considering reforms to the Insolvency and Bankruptcy Code (IBC) in order to adhere to time-bound resolution of the companies.
What is likely to be proposed?
The new bill is expected to have provisions for reducing the time for admission of the corporate insolvency resolution process, and fix a particular time period for tribunals for approval or rejection of resolution plans. The Bill seeks to strengthen IBC by carrying out certain amendments to the corporate insolvency resolution and liquidation process, as follows:
- A separate chapter on cross-border insolvency is part of the proposed Bill.
- Changes proposed in the Insolvency and Bankruptcy Code (Amendment) Bill, 2022 include ways of quickly establishing that a payment default has taken place warranting bankruptcy action, ways of maximizing recovery from dubious transactions and trades by the suspended management of the defaulting company, and steps to enforce a code of conduct for creditors.
- The focus is on how to speed up the whole resolution process by reducing the time taken. One of the options being looked at is how fast a company undergoing the resolution process can be handed over to the winning bidder as that would help in preserving the value of the assets concerned. To ensure that there is no significant value erosion, the amendments will look at putting in place provisions whereby the assets can be handed over to the winning bidder at the earliest.
- Among other changes, the bill will make it easier for overseas creditors to participate in the legal proceedings in Indian tribunals.
- Also, to introduce new rules for handling real estate bankruptcies, which would help homebuyers even as their builders wind down. The proposed change to the nation’s Insolvency and Bankruptcy Code will permit the resolution of the cases on a project-wise basis. That will allow handing over completed apartments to the home buyers even when the developer’s insolvency process is underway
- allowing an out-of-court closure of a voluntary liquidation process prior to dissolution, in the same manner in which a voluntary liquidation process is commenced. This will be supported by the establishment of the Centre for Processing Accelerated Corporate Exit, to facilitate quicker voluntary liquidation.
- providing a 30-day fixed time period to NCLTs for approval or rejection of resolution plans;
- reliance on records available with Information Utilities to establish financial debt for prescribed categories of financial debtors
- streamlining the provisions relating to improper trading and avoidable transactions by explicitly providing that proceedings against improper trading and avoidable transactions can continue even after approval of a resolution plan, by making changes to the look-back period, and giving the creditors power to apply to Adjudicating authority to investigate the avoidable transactions, in certain cases. and by correcting various drafting discrepancies in the IBC;
- to bring in a Code of Conduct for the Committee of Creditors, which takes decisions on proposals regarding insolvency resolutions.
- Government is also mulling over the measures aimed at splitting the insolvency process into two parts. If approved, it would lead to a separation in the two parts of the resolution process- approval of bids and distribution of money to the creditor.
What is more expected?
- Pre-Pack provision should be applicable to all. At present these provisions are applicable only to MSMEs.
- Time limits prescribed under the code should be strictly followed.
What is the likely impact of these proposals?
The government's proposals relating to avoidance or improper trading actions and allowing out-of-court closure of a voluntary liquidation process will enable swifter closures of voluntary liquidation processes and will strengthen the provisions relating to avoidance or improper trading actions. This will provide much-needed legal clarity for all stakeholders.
Similarly, the government's proposal to adopt the Model Law will provide certainty and clarity regarding cross-border issues (which have previously arisen and been dealt with in an ad hoc manner in cases such as Jet Airways). The government will do this by putting forth a framework that facilitates:
- Access to and participation of foreign representatives;
- Recognition of and grant of reliefs to foreign proceedings; and
- Cooperation and coordination between Indian stakeholders and their foreign counterparts.
The amendment relating to splitting the insolvency process into two parts, may lead a quicker approval of bids by the adjudicating authority, once the nod comes in from the Committee of Creditors (CoC). This will help the new promoter to come into the completion phase of the resolution plan quicker, and not wait for the distribution of money to actually start.
Finally, amendments relating to shortening timelines for admission of a CIRP and approval of a resolution plan indicate that the government is cognisant of the "timeliness" problem that has arisen in the IBC. However, this issue is unlikely to be resolved by legislative amendments, which the government has seen fail many times in the past. The government should, therefore, work with NCLTs to increase the number of judges and build capacity for swifter disposal of cases, instead of attempting to address this issue legislatively.
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