A high level committee constituted by the centre has proposed changes to the Insolvency and Bankruptcy Code (IBC) aimed at speeding up the corporate insolvency resolution process and preventing avoidable transactions or transactions likely aimed at siphoning off funds from distressed companies. Banks and other key stakeholders have regularly cited delays in the insolvency resolution process as their key concern about the insolvency regime.
The Insolvency Law Committee (ILC) has proposed that once a resolution plan is approved by the committee of creditors of a corporate debtor, the National Company Law Tribunals (NCLTs) be provided “with 30 days for approving or rejecting a resolution plan”, with the tribunal being required to provide a reason in writing if it is not able to do so in the stipulated period. The ILC was constituted in 2017 and reports from the committee have been a key influence in major amendments to the IBC.
Experts have often called out the delays by the NCLT in approving or rejecting a resolution plan after it has been approved by the creditors of a company as unnecessarily long.
The ILC has also recommended that certain creditors be required to submit records of their claims authenticated by Information Utilities (IU) so that defaults can be verified more easily to speed up the process of admission of a corporate debtor into insolvency proceedings. While the IBC already requires the NCLT to either admit or reject an application for insolvency within 14 days of an application, such a decision often takes much longer in practice, according to experts.
“Consequently, the AA (Adjudicating Authority) would only be required to consider IU authenticated records as evidence of default for Section 7 applications filed by such financial creditors as prescribed, “, the ILC recommended. Section 7 insolvency proceedings are those that are initiated by financial creditors such as banks and other financial institutions.
The ILC also proposed that the requirement for approval by the NCLT for a voluntary liquidation be removed and that only a special resolution or members’ resolution with approval of creditors representing two-thirds in value of the debt be required for the process.
“The liquidator may be required to make a public announcement of the closure of the process, and intimate concerned authorities, such as the Insolvency and Bankruptcy Board of India (IBBI) and the registrar.”
The ILC also recommended that the look back period or the period which is reviewed for avoidable transactions be started from the date of the application for insolvency proceedings instead of the date of the commencement of insolvency proceedings. The IBC provides for the insolvency professional or liquidator managing proceedings to look back and review transactions over two years and evaluate whether any transactions were preferential, undervalued, defrauding creditors or extortionate transactions and seek to reverse such transactions.
The ILC noted that delays in the acceptance of an insolvency application may lead to certain avoidable transactions not being captured in the look back period of two years prior to commencement of insolvency proceedings. The ILC also noted that the current threshold of commencement of insolvency proceedings may even incentivise management of a corporate debtor to delay acceptance of an application for insolvency to prevent certain transactions from being included in the look back period.
The ministry of corporate affairs has sought public comments on the proposed changes by January 13.