MCA’s recent discussion paper has proposed significant amendments to address several nagging issues in the working of the IBC. In the first part of this series, we highlighted some proposals that required a closer look. This piece discusses positive suggestions that could substantially improve the insolvency regime and enhance its efficiency.
The NCLT’s scope and extent of enquiry in deciding an insolvency petition under Section 7 is very limited. In that, the NCLT is required to satisfy itself of the existence of a debt and whether a default has occurred. Upon satisfaction of these twin conditions, the NCLT is required to mandatorily admit the insolvency petition. However, in Vidarbha Industries Power Limited v. Axis Bank Limited, the Supreme Court tweaked the rules of the game and armed the NCLT with the discretion to consider extraneous factors while deciding a Section 7 petition. This unsettled an otherwise settled position of law and caused discomfort amongst bankers and financial institutions. In the aftermath of this judgment, Section 7 petitions have been dismissed by the NCLT based on findings that the debtor appeared to be “reasonably healthy”, or that a debtor was unable to repay a debt only because of a “liquidity crunch” and otherwise appeared to be solvent.
To get over this judgement, the MCA has proposed to restore the earlier position and make it mandatory for the NCLT to admit Section 7 petition upon satisfaction of the twin conditions. Another matter of confusion that is sought to be put to rest is the applicability of the 14-day period under Section 7. While the intent of the legislature was for the NCLT to decide a Section 7 petition within 14 days of its filing, this timeline has been interpreted as only a directory provision. It is proposed that the provision be amended to clarify that the NCLT’s ought to decide the application within 14 days. These amendments would bring much needed clarity and prevent Section 7 petitions from languishing before the NCLT.
In State Tax Officer v. Rainbow Papers Limited, Civil Appeal No. 1661 of 2020, the Supreme Court ruled on the status of statutory creditors (such as tax authorities) under the IBC. It was held that statutory creditors who are granted a charge over the assets of the corporate debtor under any statute would be secured creditors. Almost all tax statutes provide for tax dues to be secured with the assets of the debtor company. Resultantly, the government authorities would be ranked at par with other secured creditors. This decision stirred up a hornet’s nest as it was not in tune with the intent of the IBC and previous judgements of the Supreme Court. This judgement also failed to appreciate that Section 53 itself clarifies that government dues would rank lower in priority
To undo the disruption caused by Rainbow Papers, the MCA has helpfully proposed to clarify that the definition of ‘security interest’ would only cover a consensual transaction between parties, as opposed to an interest created through mere operation of statute (which is usually in favour of government authorities). This would be a useful clarification on an issue which is central to lending arrangements in the country.
The clean slate principle, as expounded by the Supreme Court in Ghanashyam Mishra & Sons Private Limited v Edelweiss Asset Construction Co. Ltd. and Ors. and COC of Essar Steel India Limited v Satish Kumar Gupta, has been consistently endorsed as a cornerstone of the IBC. However, this did not bring about the required on-ground behavioral change amongst authorities who continue to follow the practices of the past. It is very common for authorities to either initiate fresh proceedings or continue the proceedings in relation to pre-CIRP claims even after the approval of the resolution plan. The ongoing dispute between SEBI and the successful resolution applicant in the CIRP of Dewan Housing Finance Corporation Limited before the Supreme Court is a case on point. This results in chaos and unnecessary litigation. To remedy this, the MCA paper has now proposed to strengthen the “clean slate” principle through a legislative amendment. The legislative recognition of this principle may bring a positive change and cut down litigation.
Part III of the IBC contemplates a distinct procedure for insolvency resolution of individuals. These provisions have already seen a fair bit of controversy including constitutional challenges and practical hiccups. In its paper, the MCA has suggested a flurry of changes to this regime specifically tweaking the rights available to personal guarantors.
The most critical proposal pertains to Section 96 of the IBC, which provides that legal actions in respect of debts of an individual cannot be initiated or continued once an application for insolvency resolution of the individual is filed. Thus, the statute allows an individual to use Section 96 as a reprieve against legal proceedings by filing an application for insolvency resolution under Section 94. Based on feedback received from key stakeholders (particularly the NCLT), the MCA has noted that there is potential for misuse of this provision by personal guarantors. In response, it is proposed that Section 96 should be made inapplicable to personal guarantors.
Amendments are also proposed which would increase oversight and provide more checks and balances on the process. Currently, it is not mandatory for the resolution professional to convene a meeting of the creditors in an individual insolvency resolution. The MCA has proposed that meeting of creditors be made compulsory in cases involving personal guarantors to corporate debtors. Further, a lacuna has been observed in the process inasmuch as no consequences are contemplated when a personal guarantor fails to submit a repayment plan to the creditors. To address this, it is now proposed that when the personal guarantor fails to comply with this requirement, the resolution professional could approach the NCLT to terminate the process on this account and creditors would have the right to file for the debtor’s bankruptcy. Where a corporate debtor and a personal guarantor (who has extended a guarantee to the corporate debtor) are concurrently undergoing CIRP, it is suggested that a common resolution professional is appointed for both in the interest of better coordination.
MCA has also proposed that provisions may be inserted in the individual resolution process to deal with fraudulent transactions by insolvent individuals, as is done in the case of corporate debtors. Overall, these changes could foster some much-needed faith in this framework.
The role of creditors is very different during resolution process and the liquidation process. While the CoC is the supreme decision-making body during the CIRP, the creditors have nothing substantial to do during the liquidation process. Such drastic change in the role of the creditors during the two stages of the same process is impractical and without any logic.
Once an entity is admitted into liquidation, its reins are handed over to the liquidator who has a host of duties and powers under the statute whereas the creditors have a vague consultative role. The existent regulations do not even contemplate a mechanism for change of the liquidator by the creditors. For example, during the liquidation of ORG Informatics Ltd., the lead bank filed an appeal before the NCLAT challenging the appointment of a particular liquidator by the NCLT. Refusing to entertain the appeal, the NCLAT held that “after liquidation the ‘Committee of Creditors’ has no role to play and they are simply a claimant whose matter are to be determined by the Liquidator”. Naturally, this has been a cause for concern amongst creditors who are the ultimate beneficiaries of the liquidation process.
MCA has now proposed to augment the role of the creditors during the liquidation process. It has been suggested that the role of the creditors should be expanded to enable them to supervise and support the liquidator’s functioning. In that, all decisions in liquidation may be taken by a simple majority of 51% of the CoC. It is also suggested that the CoC should be empowered to replace the liquidator at any time during the process on the strength of 66% majority. This will be a welcome change and responsive to the contemporary needs.
In addition to the proposals discussed here, several others deserve a mention. For instance, the suggestion to upgrade the electronic platform would increase accessibility. The proposal to decriminalize statutory violations makes practical sense and aligns the IBC with Central Government’s policy of decriminalizing economic offences. The suggestion to put a monitoring committee in place to oversee the implementation of a resolution plan could be an important tool in seeing the process through until the very end (although it would be better to make this a mandatory provision as opposed to a directory). All in all, we see some very pragmatic changes based on the actual experience of the NCLT, resolution professionals, creditors, etc. The legislature certainly has a tough task ahead of it in terms of balancing competing interests while addressing problems that are uniquely Indian (such as information asymmetry, over-burdened court system). These incoming amendments, if carefully worded, could go a long way in addressing a host of lingering issues.
Ashish Bhan is a Partner, Aayush Mitruka is a Senior Associate and Lisa Mishra is an Associate at Trilegal.