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The Centre has proposed several changes to the Corporate Insolvency Framework so as to further its objective of achieving time-bound resolution of stressed assets while maximising its value and balancing the interests of all stakeholders.
Towards this end, public comments have been invited by the Corporate Affairs Ministry (MCA) on as many as five proposed changes, including two crucial ones that seek to address delays in admission of application for initiation of corporate insolvency and also specify a fixed time period for approval of a resolution plan by the adjudicating authority (NCLT or DRT).
Public comments would have to be sent online latest by January 13, 2022.
Proposed changes
The government now wants to specify a fixed time period for approval or rejection of a resolution plan by the AA. Consequently, the Insolvency and Bankruptcy Code (IBC) is proposed to be amended to provide the AA with 30 days for approving or rejecting a resolution plan under Section 31.
“Where the resolution plan is not approved or rejected within this time period, the AA shall record reasons in writing for the same. This timeline shall be subject to the overall time period specified for the CIRP in Section 12 of the Code,” the MCA has said.
It may be recalled that delays are observed at the stage of approval of resolution plans by the AA. Often, applications are filed either by prospective resolution applicants and other stakeholders questioning the distributions contemplated under a resolution plan approved by the CoC or the commercial wisdom exercised by the CoC. This delays the closure of the CIRP, erodes the value of the corporate debtor and dis-incentivises potential resolution applicants from participating in the process. Such delays go against the objective of the Code to provide value-maximising outcomes for stakeholders. The government is now looking to address this delay through the proposed change.
Changes to Information Utilities
It is now felt that mandating specified financial creditors to rely only on Information Utilities (IU) records to establish default may expedite disposal of their applications. Thus, it is proposed that financial creditors as prescribed by the Central government may be required to submit only IU authenticated records to establish default for the purposes of admission of a Section 7 CIRP application.
“Where such IU authenticated records are not available, and for all other financial creditors, current options of relying on different documents for establishing default for admission of a Section 7 Corporate Insolvency Resolution Plan (CIRP) application may remain available. This will make the admission process significantly quicker and less cumbersome,” the MCA has said.
Consequently, the AA would only be required to consider IU authenticated records as evidence of default for Section 7 applications filed by such financial creditors as prescribed. This will also dissuade AAs from taking time to determine ancillary matters such as the amount of default and allow them to speedily admit Section 7 CIRP applications on the basis of IU authenticated records evidencing the existence of default, the MCA has said.
Other changes
The other changes proposed to IBC include bringing suitable amendments to Section 224 to allow the Central government to prescribe a detailed framework for contribution to and utilisation of the IBC Fund.
IBC amendments are also being proposed on closure of voluntary liquidation process. It is felt that the law should provide certainty on the manner of closing a voluntary liquidation process prior to dissolution and therefore changes are proposed to achieve this outcome.
“The closure of the process may thus be carried out by the corporate person subject to the same requirements as for initiation of the process, i.e., by way of a special resolution or members’ resolution and approval of creditors representing two-thirds in value of the debt where the corporate person owes debt to any person. If such approvals are made, the liquidator may be required to make a public announcement of the closure of the process and intimate concerned authorities such as the IBBI and the registrar,” the MCA has said.
Threshold for look-back period
On avoidable transactions, the MCA also feels the threshold for the look-back period for avoidable transactions may be altered so that a longer net can be cast to effectively capture pre-filing transactions.
It is proposed that the look-back period in Sections 43(4), 46(1) and 50(1) may be amended as follows: the threshold for the look-back period may be changed from the date of commencement of CIRP to the date of filing of the application for initiation of CIRP in respect of the corporate debtor that has been admitted; and the period between the date of filing and the date of commencement of CIRP may additionally be included in the suspect period for such transactions.
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