The insolvency watchdog has proposed a raft of regulatory changes, including a two-staged approval process for rescue plans, part-sale of stressed firms and a new mechanism to handle bankruptcy of interconnected entities of a corporate group, to speed up resolutions and prevent the erosion of toxic asset value.
In a discussion paper, the Insolvency and Bankruptcy Board of India (IBBI) has suggested that under the two-stage approval process, the financial bid and the basic implementation framework of the resolution plan may be approved early. This would allow the successful resolution applicant to take over the stressed firm and implement the rescue plan early.
Subsequent hearings by the National Company Law Tribunal (NCLT) could address inter-creditor disputes, distribution of resolution proceeds, and other aspects, the regulator said.
The corporate insolvency resolution process (CIRP) is supposed to be completed within 180 days and a 90-day extension is granted, subject to the National Company Law Tribunal approval. However, the process usually stretches, thanks to litigation and delay in admission.
Even a 330-day deadline, which includes time spent on legal proceedings, is hardly maintained, leading to asset value erosion.
In about 71% of the cases where resolution was in progress as of September 2024, the 270-day time frame was breached, as per the IBBI data.
The IBBI has sought public comments by February 25 on the proposed changes in the discussion paper on Streamlining Processes under the Insolvency and Bankruptcy Code (IBC): Reforms for Enhanced Efficiency and Outcomes.
Mechanism for interconnected entities
The regulator plans to roll out a new mechanism for greater collaboration among financial creditors overseeing the corporate insolvency resolution process (CIRP) involving interconnected entities of a corporate group.
The mechanism could include provisions for joint hearings, appointment of a common resolution professional for the relevant entities, information sharing protocols and coordinated timelines.
“This amendment aims to increase efficiency, reduce costs, and improve outcomes in cases involving multiple interconnected entities undergoing CIRP simultaneously,” the regulator said.
A formal framework was necessitated after the interconnected nature of group companies delayed insolvency resolution in a few cases, such as Videocon, Era Infrastructure, Lanco, Educomp, Amtek, Adel, Jaypee and Aircel.
Part-sale of firms
The regulator also proposes to allow the resolution professional to invite rescue plans concurrently for both the stressed company as a whole and for its specific businesses or assets. This would remove the extant requirement of seeking asset-specific plans only after attempts to invite resolution plans for the entire company have failed.
“By enabling concurrent invitations, the resolution process can reduce timelines, prevent value erosion in viable segments, and encourage broader investor participation,” the regulator said.
Yogendra Aldak, partner at Lakshmikumaran & Sridharan Attorneys, said the slew of proposed amendments “aim at strengthening the decision-making process of the committee of creditors (CoC)”.
The planned mandatory review of operational expenses by CoC regularly, particularly for leased properties, would lead to better management of the financial sustainability of the stressed firm, Aldak said.
The IBBI also aims to bolster the regulatory framework for avoidance transactions—deals made by a company nearing bankruptcy that could be deemed suspicious or detrimental to lenders. It suggests enhanced disclosure needs, regular updates on newly-identified avoidance transactions and related applications. Disclosed avoidance transactions may be incorporated into resolution plans, and they need to be either pursued either by creditors for their benefit or transferred as part of the resolution plan.
Operational expenses
The regulator wants to mandate regular review of significant operational expenses by a stressed firm during the course of insolvency resolution, especially with respect to leased property. Resolution professionals will be required to present an assessment of all substantial operational expenses, particularly on leased properties, to the CoC within 30 days of its formation. Thre would be a quarterly review of these expenditures as a mandatory CoC meeting agenda.
Resolution professionals will be mandated to present all resolution plans to the CoC and can’t withhold any, assuming it doesn’t comply with the rules.
Similarly, a stressed firm will have to submit a “statement of affairs”, containing essential information–including financial statements for the previous three years–along with its reply to the application seeking insolvency proceedings against it.
“If the proposed changes are implemented, they can improve the timelines of processes leading to faster resolution and accountability with reduced litigation,” said Manmeet Kaur, partner at law firm Karanjawala & Co.
The regulator has also decided to ease the liquidation process by scrapping the provisions relating to the sale of a firm as a going concern in Liquidation Regulations.
To enable easier flow of funding to the stressed firm during the CIRP, the regulator seeks to empower the CoC to invite financiers to attend its meetings as observers, with no voting rights. This, the regulator hopes, will enhance the financiers’ trust in the ability of the stressed firms to pay back.
As part of amendments to insolvency resolution regulations involving personal guarantors to corporate debtors, the resolution professional will have to notify the non-submission of a resolution plan. The NCLT may then terminate the resolution process for the personal guarantors, “thereby enabling the debtor or creditor to file an application for bankruptcy”.
