Money & Banking

Performance security a must for corporate resolution, says IBBI

KR Srivats New Delhi | Updated on January 25, 2019

Supreme Court upholds IBC in its ‘entirety’

The Insolvency and Bankruptcy Board of India (IBBI) has mandated resolution applicants to furnish performance security in corporate insolvency process. This has been stipulated to ensure that corporate resolution plans, once approved, are not withdrawn on a whim.

The idea is to encourage only those resolution applicants who are genuine, credible, and capable of submitting and implementing the resolution plans. Performance security would need to be furnished only in those cases where the resolution plan has been approved by the Committee of Creditors (CoCs).

For mandating performance security, insolvency regulator IBBI has now amended the existing Corporate Insolvency regulations. The amended regulations now specify that the CoC will have to approve the performance security of such nature, value, duration, and source having regard to the nature of resolution plan and business of the corporate debtor.

The performance security will get forfeited if the resolution applicant, after approval of the resolution plan by the adjudicating authority, fails to implement or contribute to the failure of implementation of the plan.

IBBI has, through another significant amendment to Corporate Insolvency regulations, enabled a creditor, who is aggrieved by non-implementation of a resolution plan approved by an Adjudicating Authority, to apply to the Adjudicating Authority to give directions. This amendment flows from the recent experience faced by lenders in a big steel company’s resolution plan, industry sources said.

Experts’ take

Bikash Jhavar, Partner, L&L Partners, said: “This amendment essentially gives regulatory comfort for what was anyway fairly standard good practice adopted by the Committee of Creditors. CoCs, and now the IBBI, require that the Resolution Applicants don’t look at their Resolution Plan as an open option to acquire or not acquire as per their discretion after the CoC and the NCLTs have approved the plan.

“A performance security will ensure that beyond the actions which anyway can be additionally taken under the IBC, the Resolution Applicants feel a more immediate monetary pain. This regulatory requirement is welcome.”

Saurav Kumar, Partner, IndusLaw, a law firm, said that the amendment will bring about some more sincerity in the game. Recent events have sparked discussions around genuine bids, he said. “With the amendment, such discussions may be put to rest,” said Kumar.

Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas, said there have been multiple cases of resolution applicants backtracking after the approval of their resolution plan.

“This (performance security) is a welcome move as it would help address such parties, thereby helping preserve the spirit of the IBC,” said Dubey.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said: “The amendment aims at ensuring that the resolution plan implementation does happen, and, therefore, requisition of performance security is a step in that direction. Also, it would give creditors a recourse in ensuring obligations assumed are equally honoured.”

SC verdict

Meanwhile, the Supreme Court, on Friday, upheld the Insolvency and Bankruptcy Code (IBC) in its “entirety” and its Constitutional validity.

The apex court, while giving this ruling, dismissed a batch of 10 petitions that challenged various provisions of the IBC, such as timelines prescribed and jurisdiction of the NCLAT.

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas, said: “Supreme Court’s upholding of the IBC will add necessary certainty by way of long-term clarity for all stakeholders. It should significantly boost investor confidence, and effectively enhance participation.”

Published on January 25, 2019

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