[Key Highlights] Insolvency Law Committee Report

Table of Contents

1. Report mandates financial creditors to rely on Information Utility for establishing default

2. Exemptions from Moratorium u/s 14(3)(a) to be exercised only in exceptional circumstances

3. Report proposes clarificatory amendment w.r.t. issues related to Avoidable Transactions and Improper Trading

4. Report proposes a mechanism to curb late submission of unsolicited resolution plans

5. Report recommends 30 days timeline for approval or rejection of resolution plans by Adjudicating Authority

6. The Report prescribes issuance of standard guidelines w.r.t. pre-pack insolvency and fast track insolvency process

7. The Committee proposes for statutory recognition of Stakeholders Consultation Committee

8. Report suggests mandatory consultation by liquidator from Stakeholder Consultation Committee

9. Report calls for contribution by Secured Creditors towards Workmen’s Dues and bearing expenses incurred by liquidator

10. Report clarifies the provisions w.r.t the voluntary liquidation process of corporate persons u/s 59 of IBC

11. Report suggests a detailed framework for the utilization of the IBC Fund

12. The Committee suggests a mechanism for appealing orders issued by IBBI

13. Report proposes subordinate legislation making to carry out the purpose of IBC

Insolvency Law Committee’s Report– Dated: 20.05.2022

The Insolvency Law Committee in its 5th report has made key recommendations to strengthen the bankruptcy framework in India. The Key recommendations include:

(a) Mandating Reliance on IUs for Establishing Default,

(b) Grant of exemptions from Scope of Moratorium only in exceptional circumstances,

(c) Issues related to Avoidable Transactions and Improper Trading,

(d) Curbing Submission of Unsolicited Resolution Plans and Revisions of Resolution Plans, etc.

The Key recommendations in the committee report are summarized hereunder:

1. Report mandates financial creditors to rely on Information Utility for establishing default

The Committee noted that mandating the financial creditors to rely only on Information Utility (IU) records to establish default may expedite the disposal of applications. Therefore, the Committee has decided that the financial creditors that are financial institutions and such other financial creditors as may be prescribed by the Government must be required to submit only IU authenticated records to establish default for the purposes of initiating the CIRP application u/s 7 of the IBC.

Further, where such IU authenticated records are unavailable and for all other financial creditors, the current option of relying on different documents for establishing default may remain available. Thus, suitable amendments to Section 7 may be made in this regard.

2. Exemptions from Moratorium u/s 14(3)(a) to be exercised only in exceptional circumstances

The committee noted that since moratorium is an essential feature of the CIRP, which ensures that the assets of the corporate debtor are kept together during the CIRP, and the corporate debtor is continued as a going concern, thus facilitating value maximisation and orderly completion of the CIRP.

Therefore, the Committee recommended that the exemption under Section 14(3)(a) of the IBC should be exercised only in exceptional circumstances, which may not hinder the smooth conduct of the CIRP and hence, should not be relaxed until found necessary from the implementation experience of the Code.

3. Report proposes clarificatory amendment w.r.t. issues related to Avoidable Transactions and Improper Trading

The committee noted that the Legislature’s intent behind Section 26 of the IBC was to make proceedings for avoidable transactions independent of the CIRP proceedings.

Therefore, an application for avoidable transactions is not restricted by the timelines provided for the CIRP under Section 12 of the IBC.

In order to bring clarity in this regard, the Committee decided that a clarificatory amendment can be made to this provision so that the completion of the CIRP proceedings does not affect the continuation of proceedings for avoidable transactions or improper trading.

3.1 Jurisdiction of the Adjudicating Authority to entertain or dispose of application u/s 60 of IBC

The Committee observed that Section 60 read with Section 26 of the IBC suggests that the NCLT, the Adjudicating Authority has the jurisdiction to entertain or dispose of any application on matters related to insolvency proceedings of the corporate debtor u/s 60 (5) of the IBC. Further, the phrase ‘entertain or dispose of’ suggests that the jurisdiction of NCLT is not limited to a question of law or fact, however, extends to the disposal of proceedings. Hence, in this regard amendments to Section 60 are not required.

3.2 Manner of conducting avoidance proceedings after the conclusion of CIRP

The Committee discussed the manner of conducting proceedings for avoidance of transactions and improper trading after the conclusion of CIRP. The Committee agreed that the Code should be amended to mandate that the resolution plan must specify the manner of undertaking proceedings for avoidance of transactions and wrongful trading if such proceedings are to be continued after the approval of the plan. This includes specifying details such as the person who will continue to pursue such proceedings and the manner of payment of the costs of such proceedings.

Further, the Committee agreed that the Adjudicating Authority should also be satisfied that the plan provides sufficient details of the manner of continuation of proceedings for avoidance and improper trading, after its approval.

3.3 Threshold date for the look-back period

The Committee agreed that the threshold date for the look-back period for avoidable transactions under the Code must be the date of the filing of the application for initiation of the CIRP i.e. the initiation date. Further, transactions from the initiation date until the insolvency commencement date should also be included in the look- back period. In this regard, Sections 43, 46 and 50 should be suitably amended.

4. Report proposes a mechanism to curb late submission of unsolicited resolution plans

The committee noted that the regulations must clearly lay down a mechanism for reviewing late submissions of resolution plans or revisions to resolution plans. Further, suitable amendments must be made in the Code to ensure that the procedure provided in the regulations has due sanctity.

5. Report recommends 30 days timeline for approval or rejection of resolution plans by Adjudicating Authority

The committee noted that suitable amendments must be made to section 31 of the IBC to provide that the Adjudicating Authority need to approve or reject a resolution plan within 30 days of receiving it. Further, the Adjudicating Authority is required to record reasons in writing for the cases where it had not passed an order approving or rejecting the resolution plan within the stipulated time period.

6. The Report prescribes issuance of standard guidelines w.r.t. pre-pack insolvency and fast track insolvency process

The committee noted that it would be suitable for the IBBI to issue guidelines providing the standard of conduct of the CoC while acting under the provisions governing the CIRP, pre-packaged insolvency resolution process and fast-track insolvency resolution process. This may be in the form of guidance that provides a normative framework for conducting these processes.

In order to empower the IBBI to issue such guidelines, the Committee recommended that appropriate amendments can be made to Section 196 of the IBC. Further, the Committee discussed that the MCA may consult with relevant financial sector regulators such as SEBI and RBI, to frame an appropriate enforcement mechanism for the standard of conduct.

7. The Committee proposes for statutory recognition of Stakeholders Consultation Committee

The Committee noted that the Stakeholders Consultation Committee (SCC) is a consultative body which is meant to guide the liquidator on certain key decisions. The regulations provide a detailed framework for the SCC and the practice of seeking consultations from the SCC is regularising. Therefore, the committee concluded that currently there is no gap in the Code requiring the need to statutorily encode enabling provisions for recognition of the SCC.

8. Report suggests mandatory consultation by liquidator from Stakeholder Consultation Committee

The Committee noted that Section 35(2) of the IBC should be suitably amended to provide that the liquidator must mandatorily consult with the SCC so as to ensure that the SCC is able to provide commercial inputs on the functions of the liquidator as well as conduct oversight over the liquidator.

9. Report calls for contribution by Secured Creditors towards Workmen’s Dues and bearing expenses incurred by liquidator

The Committee noted that Section 52 of the IBC should be amended to require secured creditors who choose to realise their security interest outside the liquidation process to – (a) contribute towards workmen’s dues under Section 53(1)(b)(i) and (b) repay the liquidator for any expenses incurred by her for preserving and protecting the security interest of such secured creditors.

9.1 Contribution towards Workmen’s Dues

The Committee recommended that Section 52(8) of the code must be suitably amended to state that where the secured creditor realizes its security interest outside the liquidation process, the amount payable towards the workmen’s dues, as it would have shared in case it had relinquished its security interest, shall be deducted from the proceeds of such realization.

9.2 Contribution towards expenses for Security Interest

The Committee recommended that Section 52(8) should be suitably amended to require a secured creditor, stepping out of the liquidation process, to pay the liquidator for any expenses incurred by her for the preservation and protection of the security interest before its realization

9.3 Consequences of non-compliance

The Committee recommended that Section 52 should be suitably amended to provide that where the secured creditor fails to make the required contributions recommended above, his security interest should be deemed to be have been relinquished and made a part of the liquidation estate.

10. Report clarifies the provisions w.r.t the voluntary liquidation process of corporate persons u/s 59 of IBC

Section 59 of the IBC provides for the Voluntary Liquidation Process (VLP) of corporate persons and lays down the procedural and substantive requirements for initiation and conduct of the VLP.

10.1 Requirements for initiation of the Voluntary Liquidation Process (VLP) of an LLP

Section 59(3) of the IBC acts as a guiding force for specifying conditions and procedural requirements for a VLP of an LLP. In practice, a VLP is initiated by an LLP based upon the procedure laid down in the regulations. The Committee noted that

providing an explicit reference to an LLP in Section 59 of IBC is a technical issue and an amendment to address the same is not required at present.

10.2 Termination of VLP

The Committee recommended that the corporate person should pass a special resolution or members’ resolution for terminating the VLP. Where the corporate person owed any debts to the creditors on the date of such resolution, approval of creditors representing two-thirds in value of such debt is required to be availed.

Further, the VLP will be deemed to have been terminated on the date on which such information is provided to the RoC and the term of the liquidator will come to an end.

11. Report suggests a detailed framework for the utilization of the IBC Fund

The committee noted that suitable amendments may be made to Section 224 to allow the Government to prescribe a detailed framework for contribution to and utilization of the IBC Fund.

12. The Committee suggests a mechanism for appealing orders issued by IBBI

The committee noted that the Code should provide a mechanism for appealing orders issued by the IBBI and its disciplinary committee u/s 220 of the IBC. Further, the Committee suggested that appeals from orders u/s 220 may be filed with the NCLAT and suitable amendments should be made to the IBC in this regard.

13. Report proposes subordinate legislation making to carry out the purpose of IBC

The Committee observed that Sections 239(1) and 240(1) of the IBC provide the general power for making rules and regulations under the Code. These provisions are limited to permitting the making of subordinate legislation for carrying out the provisions of the Code. Thus, this power limits the making of subordinate legislation for filling gaps in the Code that are not envisaged by the provisions of the Code.

Therefore, the Committee noted that suitable amendments must be made to Section 239(1) and 240(1) to allow subordinate legislation making for carrying out the purposes of the IBC.