Amendments in the Insolvency & Bankruptcy Law

IBBI Updates November 2023

1. Filing of CIRP Forms for the purpose of monitoring corporate insolvency resolution processes and performance of insolvency professional entities under the Insolvency and Bankruptcy Code, 2016 and the regulations made thereunder

The insolvency professional entities (“IPEs”) were allowed to get enrolled, registered and act as IPs for conducting the insolvency processes under the Insolvency and Bankruptcy Code, 2016 (“the Code”) vide the IBBI notified the IBBI (Insolvency Professionals) (Fourth Amendment) Regulations, 2022.

However, the facility for submitting the corporate insolvency resolution process forms (CIRP Forms) as per Regulation 40B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) read with relevant circulars issued thereunder was not made available to the IPEs acting as Insolvency Professionals (“IPs”). Hence, these IPEs were unable to submit the relevant CIRP Forms on the website of the IBBI for the processes/ assignments handled by them.

In view of the above on September 01, 2023, IBBI vide Circular No. IBBI/CIRP/60/2023 extended the said facility for submitting the CIRP Forms to IPEs acting as IPs.

These IPEs shall access the said platform with the help of a unique username and password provided by the IBBI and authorise an IP handling the process to upload/ submit the CIRP Forms. Thereafter, the authorised IP shall submit the CIRP Forms along with relevant information and records through his username and password as provided to him in capacity of individual IP.

To facilitate submission of forms for all assignments handled by these IPEs through the facility being introduced now, CIRP forms filed till 30th September, 2023 shall not attract any fee as provided under regulation 40B of the CIRP Regulations. Thereafter, it shall attract fee as specified in sub-regulation (4) of regulation 40B of the CIRP Regulations. The contents of the relevant circulars issued to facilitate submission of records and information by IPs shall apply to all the assignments handled by the IPEs acting as IPs.

The link to the aforesaid Notification is as follows:

https://ibbi.gov.in//uploads/legalframwork/7fa9e4a4ee918732b6287d43dd064fe6.pdf

2. Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Second Amendment) Regulations, 2023

On September 18, 2023, IBBI vide Notification No. IBBI/2023-24/GN/REG104 notified the Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Second Amendment) Regulations, 2023 (“Amendment Regulations”) and amended the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“the Regulations”).

The following amendments have been made in the Regulations:

1. Form A and Form AA under Second Schedule to the Regulations have been amended;
2. Under clause (b) of Regulation 5 (Qualification & Experience for registration as Insolvency Professional) a time period of 12 months has been introduced for completion of pre-registration educational course from an insolvency professional agency after enrolment as a professional member;
3. In Sub-regulation (2) of Regulation 6, the word “Board” has been substituted by the word “Insolvency Professional Agency” (IPA) thus requiring the application for Certificate of Registration as an Insolvency Professional to be made to an IPA;
4. Insertion of new Sub-regulation (2A) in Regulation 6, prescribing time period of 30 days for processing of application by the IPA and forwarding to IBBI, which excludes the time given by the IPA to the professional member for submitting additional documents, information, or clarification, as the case may be;
5. In Sub-regulation (1) of Regulation 7, the time limit for the IBBI to grant certificate of registration to applicants has been reduced from 60 days to 30 days from receipt of application, excluding the time given by IBBI for presenting additional documents, information or clarification, or appearing in person, as the case may be.
6. In Sub-regulation (2) of Regulation 8, the time limit for communicating the reasons for refusal to grant certificate by IBBI has been reduced reduced from 60 days to 30 days from receipt of application, excluding the time given by IBBI for presenting additional documents, information or clarifications, or appearing in person, as the case may be;
7. In Regulation 10 requiring IPA to inform IBBI within 1 working day of taking actions mentioned in the said regulation, the following actions have been inserted:
  1. accepts the application for surrender of membership and strikes the name of the professional member from its
  2. expels the professional member;
  3. receives intimation of demise of an individual or winding up or dissolution of a company, limited liability partnership or registered partnership firm and strikes the name of the professional member from its registers.
8. Insertion of new Regulation 10A for Surrender of Certificate of Registration;
9. Insertion of new Regulation 10B for Special procedure for action on surrender, expulsion, etc.;

The link to the aforesaid Notification is as follows:

https://ibbi.gov.in//uploads/legalframwork/f76838225028debe733984fb02cd2ec3.pdf

3. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2023

On September 18, 2023, IBBI vide Notification No. No. IBBI/2023-24/GN/REG106 notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2023 (“Amendment Regulations”) and amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“the Regulations”).

The following amendments have been made in the Regulations:

Insertion of new Regulation 2D requiring financial creditor to submit details of debt, default and limitation in respect of applications under section 7 or section 9;
Insertion of new Regulation 3A, inter-alia providing for assistance and cooperation by the personnel of the corporate debtor to the interim resolution professional or resolution professional to take control and custody of the records and assets of the Corporate Debtor (“CD”);
Substitution of Sub-regulation (1) of Regulation 12 allowing a creditor who fails to submit claim with proof within the time stipulated in the public announcement, to submit his claim with proof to the interim resolution professional (“IRP”) or the resolution professional (“RP”), as the case may be, up to the date of issue of request for resolution plans under regulation 36B or ninety days from the insolvency commencement date, whichever is later. Further, the creditor shall be required to provide reasons for delay in submitting the claim beyond the period of ninety days from the insolvency commencement date;
Deletion of Sub-regulation (2) of Regulation 12;
Insertion of new Sub-regulations (1A) to (1C) in Regulation 13 requiring the following
1. IRP or RP to provide reasons for not collating claim after verification;
2. IRP or RP to verify all claims received after the period specified under sub-regulation (1) of regulation 12 and up to seven days before the date of meeting of creditors for voting on the resolution plan or the initiation of liquidation and categorise them as acceptable or non-acceptable for collation;
3. intimate the creditor within 7 days of categorisation thereof as mentioned above and provide reasons where such claim has been categorised as non-acceptable for collation;
4. put up the claims categorised as acceptable and collated by him to the committee in its next meeting for its recommendation for inclusion in the list of creditors and its treatment in the resolution plan, if any and submit such claims before the Adjudicating Authority for condonation of delay and adjudication wherever applicable.
5. Insertion of new Sub-regulations (3A) to (3C) in Regulation 16A relating to appointment of insolvency professional by the financial creditors as their authorised representative;
6. Substitution of Sub-regulation (8) in Regulation 16A relating fee entitlement of authorised representative of creditors in a class for attending meeting of the committee;
7. Insertion of new Sub-regulation 10 in Regulation 16A relating to roles & responsibilities of the authorised representative of a class of creditors;
8. Substitution of Sub-regulation (1) of Regulation 28 prescribing a time line of 7 days for intimation to IRP or RP regarding assignment or transfer of a debt by a creditor during the insolvency resolution process period;
9. Insertion of new Regulation 30B allowing committee members to propose an audit of CD along with the scope, objectives, timeframe, estimated cost, name of auditor who shall be an insolvency professional etc.
10. Substitution of Sub-regulation (1) of Regulation 36B relating to issue of information memorandum, evaluation matrix and a request for resolution plans to every resolution applicant in the final list and also to every prospective resolution applicant in the prospective list if such documents are available;
11. Substitution of Form G in Schedule I to the Regulations;
12. Amendment in Form H in Schedule I to the Regulations inter-alia relating to requirement of attaching minutes of the committee meeting relating to discussion and decisions about resolution plan.

The link to the aforesaid Notification is as follows:

https://ibbi.gov.in//uploads/legalframwork/82a0d8c13a4ad67aac73623ca3b22c2f.pdf

4. Clarification w.r.t. Liquidators’ fee under clause (b) of sub-regulation (2) of Regulation 4 of IBBI (Liquidation Process) Regulations, 2016

Sub-regulation (1) and (1A) of Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) provides that the fee payable to the liquidator be decided by the Committee of Creditors (CoC) or Stakeholders’ Consultation Committee (SCC), as the case may be.

All regulations referred below are the regulations of Liquidation Regulations.

In cases other than those covered under sub-regulation (1) and (1A) of Regulation 4, the liquidator shall be entitled to a fee as provided in Clause (b) of Sub-regulation (2) of Regulation 4.

Based on records examined during the inspections and investigations and interaction with stakeholders, it has been observed that different interpretations of the below highlighted terms in Clause (b) of Sub-regulation (2) of Regulation 4 are being made by the liquidator:

Regulation (4)(2)(b):
as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under:

Amount of Realisation / Distribution	Percentage of fee on the amount realised / distributed
Amount of Realisation / Distribution	in the first six months	in the next six months	Thereafter
Amount of Realisation (exclusive of liquidation costs)
On the first 1 crore	5.00	3.75	1.88
On the next….	...	...	...
Amount Distributed to Stakeholders
On the first 1 crore	2.5	1.88	0.94
On the next….	...	...	...

Accordingly, on September 28, 2023, the Insolvency and Bankruptcy Board of India (“IBBI”) vide Notification No. No. IBBI/LIQ/61/2023 (“the Notification”), for the purposes of interpretation by the liquidators, clarified the above highlighted terms:

Amount realised: Regulation 4(2)(b), provides that the fee shall be “as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation….”

“Amount realised” means an amount that is being realised from the sale of an asset where the asset changes form. Where the asset is already liquid such as cash and bank balance including term deposits, mutual funds, and quoted shares, there is no ‘realisation’, and funds are readily available for distribution. The amount realised, thus, implies the proceeds from the sale/realization from the liquidation of assets which are not liquid. Therefore, the liquidator is not entitled to a fee on realisation for these liquid assets and is entitled to a fee only on distribution.

Clarification: “Amount realised” shall mean amount realised from assets other than liquid assets such as cash and bank balance including term deposit, mutual fund, quoted share available on start of the process after exploring compromise and arrangement, if any.

Other liquidation costs:

The term “Amount of Realisation (exclusive of liquidation costs)” given in the table in Regulation 4(2)(b) mandates that all liquidation costs are to be deducted from the realisation amount. However, as per Regulation 4(2)(b), “other liquidation cost” is to be deducted from realisation. There is a gap in understanding in the market about what components of the liquidation cost are to be excluded from the liquidation cost to derive “other liquidation cost”.

The component that can be excluded is only that part of the liquidation cost which is itself dependent for its calculation on other liquidation costs i.e., liquidator’s fee. Including the same in “other liquidation cost” would entail a circular reference to the liquidator fee for the calculation of liquidator fee making the calculation very tedious and impractical. Hence, all other components of liquidation cost apart from liquidator’s fee shall be part of the “other liquidation cost”.

In few cases, liquidators are only considering process cost as “other liquidation cost” and thereby, exclude the cost incurred in preserving and protecting the assets of the Corporate debtor (“CD”), and running the CD as a going concern to calculate “other liquidation cost”. Before amendment dated 25th July, 2019 to the Liquidation Regulations, the liquidation cost under Regulation 2(1)(ea) had four components. To clarify the liquidation cost, through aforesaid amendment four new components of liquidation cost were added. In some cases, it is being wrongly interpreted that these newly added four components, inter-alia, such as going concern costs etc., are to not be considered as the liquidation cost in respect of all those cases where the liquidation process commenced before the aforesaid amendment. Since these four components are paid in priority to payment to stakeholders as per section 53 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by virtue of it being liquidation cost under section 53(1)(a) of IBC, these newly added components were always part of the liquidation cost irrespective of the date of commencement of liquidation process. Any other interpretation would create uncertainty about the priority of payment of these components of liquidation cost over payment to stakeholders.

Furthermore, the term “other liquidation cost” existed right from the inception of liquidation regulations and thus could not have meant to exclude certain components of liquidation costs from “liquidation costs” which were added by a subsequent amendment in 2019.

Amount distributed to stakeholders:

Section 53 of the IBC provides for order of priority for making distribution out of proceeds from sale of assets. Further, Regulation 42 of the IBC provides that:

Distribution.

(1) …….

(2) The liquidator shall distribute the proceeds from realization within ninety days from the receipt of the amount to the stakeholders.

(3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made.

Furthermore, the table in Regulation 4(2)(b) provides for liquidator’s fees to be calculated as a percentage of the ‘Amount Distributed to Stakeholders’. However, in few cases, it has been observed that the liquidators are erroneously calculating fees even on distribution of the Corporate Insolvency Resolution Professional (“CIRP”) cost and liquidation cost, including expenses incurred in running the business of the CD during the liquidation process. The conjoint reading of Regulation 42(2) and 42(3) read with Regulation 4(2)(b) mandates the liquidator to distribute the proceeds from realization after deducting the payment of CIRP cost and liquidation costs as these costs do not represent distribution of proceeds to stakeholders/ claimants.

Amount of Realisation /Distribution:

It is observed that different interpretations are being made for the words “Amount of Realisation /Distribution” used in table in the Regulation 4(2)(b). Though, most of them are interpreting it correctly to mean the cumulative value of assets realised till date, few are interpreting it to mean the value of assets realised during the first six months and then next six months and so on. The words “Amount of Realisation /Distribution” are mentioned in column 1 only. Other columns are for percentage of fees on such realisation/distribution. Thus, the cumulative value of amount realised/ distributed is to be bifurcated in various slabs as per column 1. Only after that, liquidator has to divide the amount realised in a particular slab based on the tenure in which it was realised such as in first six months, next six months or thereafter. Out of the total amount pertaining to that slab, for the amount realised in first six months, % of fees will be as per column 2; for the amount realised in next six months, % of fees will be as per column 3; and for the amount realised thereafter, % of fees will be as per column 4.

Illustration: Assume the liquidation commencement date is 01.11.2021. Further, the liquidation cost and period spent on compromise or arrangement are nil. The liquidator has realised Rs. 10 crore on 01.01.2022 and another Rs. 1 crore on 01.10.2023.

Liquidator’s fee – erroneously computed:

Liquidator fee while interpreting “Amount of Realisation /Distribution” to mean value of assets realised during the first six months and then next six months period and so on, without considering the slab value of assets, computed as under:

Particulars	in first six months	Fee	in next six months	Fee
On the first 1 crore	5.00%	5,00,000	3.75%	3,75,000
On the next 9 crore	3.75%	33,75,000
Total		38,75,000		3,75,000
Total fee				42,50,000

In the same illustration, if we consider that entire Rs. 11 crores was realised within 6 months, the calculation of the liquidator fee is as under:

Particulars	in the first six months	Fee
On the first 1 crore	5.00%	5,00,000
On the next 9 crore	3.75%	33,75,000
On the next 40 crore	2.80%	2,80,000
Total fee		41,55,000

In the above illustrations, the liquidator is getting more fee if he realises the assets within 12 months in comparison to realisation of the assets within 6 months which is against the spirit of the regulation. Thus, it is clear that the cumulative value of amount realised/ distributed is to be bifurcated in various slabs as per column 1. Only after that, the liquidator has to divide the amount realised in a particular slab based on the tenure in which it was realised such as in first six months, next six months or thereafter. Thereafter, fee rate for various amounts realised in various periods are to be taken as per columns 2, 3 and 4.

Clarification: “Amount of Realisation /Distribution” shall mean cumulative value of amount realised/ distributed which is to be bifurcated in various slabs as per column 1 and thereafter the same is to be bifurcated into realisation/ distribution in various periods of time and then corresponding fee rate from the table is to be taken.

Period for calculation of fee: It has been observed that the liquidators are suo-moto excluding various time periods such as stay by court on sale of a particular asset, delay in relinquishment by secured creditor, for the purpose of calculating the fee. However, since the liquidator works under the overall guidance of the Adjudicating Authority, any such exclusion should have stamp of judicial authority and should be only for the asset for which such exclusion has been granted.

Clarification: Exclusion for purpose of fee calculation is to be allowed only when the same has been explicitly provided by the Hon’ble NCLT/ NCLAT or any other court of law and will operate only for the asset which could not have been realised during the excluded period.

The IPs who are currently handling or have handled in the past any liquidation assignment shall ensure that the fee charged by them under Regulation 4(2)(b) is in accordance with above clarifications and inform the same to the Board electronically on the website of IBBI. In cases, where excess liquidator’s fee is returned and distributed on or before 31^stOctober, 2023 no disciplinary proceedings will be initiated on the ground that the excess fee was charged and has now been returned.

The link to the aforesaid Notification is as follows:
https://ibbi.gov.in//uploads/legalframwork/276e15152ac2147c101fcbfbf37d0ddb.pdf