Amendments in the Insolvency & Bankruptcy Law
IBBI Updates October 2023
1. Discussion Paper on Streamlining the Voluntary Liquidation Process
On October 05, 2023, IBBI issued a Discussion Paper on streamlining the Voluntary Liquidation Process to provide a completely market-driven approach with respect to the voluntary liquidation process to ensure faster outcomes at the least possible cost.
The following proposals have been made:
- The directors of the corporate person while making a declaration for initiation of the process, shall also disclose pending proceedings or assessments before statutory authorities, and pending litigation, in respect of the corporate person and ensure that sufficient provision has been made to meet the obligations arising, if any, on account of these pending matters;
- If the liquidator fails to liquidate the corporate person within the stipulated 90 days or 270 days as the case may be, he shall hold a meeting of contributors of the corporate person and file within 15 days after the end of the quarter in which the stipulated period for completion of liquidation has expired, a Status Report to the Board explaining why the liquidation has not been completed and specify, along with reasons, the additional time that shall be required for completing the process;
- If a Corporate person falls under the category of Financial Service Providers (FSP), it shall declare that the category of FSP has been notified by the Central Government under section 227 of the Code and the declaration by the corporate person shall also provide that the corporate person has obtained prior permission of appropriate regulator for initiating voluntary liquidation proceedings;
- Where a withdrawal request is received from the claimant, the Board shall direct the liquidator in all such cases where the dissolution order has not been passed, for verification of the claim. This includes checking the legitimacy of the claim, the amount involved, and any other relevant details. Post verification, the liquidator shall submit their findings and opinion to the IBBI to enable it to permit withdrawal even before dissolution;
- Form H and final report may be submitted on the electronic platform as may be notified by the Board;
- Regulations may be amended to provide for submission of order of dissolution to the Board, along with the final data in the electronic platform as may be notified by the Board.
The link to the aforesaid Discussion Paper is as follows:
https://ibbi.gov.in/uploads/whatsnew/51d632f60c108ac9731561c8878cc3f8.pdf
2. IBBI invites suggestions to simplify, ease, and reduce the cost of compliance with Regulations notified under the Insolvency and Bankruptcy Code, 2016
On October 12, 2023, IBBI vide Press Release No. IBBI/PR/2023/14 invited suggestions to “simplify, ease, and reduce the cost of compliance” of the regulations notified by the Board under the Insolvency and Bankruptcy Code, 2016. The comments have to be shared by December 31, 2023.
The same is pursuant to the announcement made by the Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman in the Budget 2023 speech, stating that the financial sector regulators would consider the suggestions of the public and regulated entities in carrying out a “comprehensive review” of the existing regulations.
The procedure to submit the comments shall be the same as provided in Press Release No. IBBI/PR/2023/05 dated May 04, 2023.
The link to the aforesaid Press Release is as follows:
https://ibbi.gov.in/uploads/press/25cd5db9c4dc848fd5242704c8218810.pdf
3. Discussion Paper on “Rationalisation of the Regulatory Framework for Enhancing the Effectiveness of Insolvency Professional Entities in Insolvency Resolution Process”
On October 20, 2023, IBBI issued a Discussion Paper on the Rationalisation of the Regulatory Framework for Enhancing the Effectiveness of Insolvency Professional Entities in the Insolvency Resolution Process.
This paper seeks to implement measures to enhance the effectiveness of Insolvency Professional Entities (IPE) by rationalizing the regulatory framework to meet the emerging requirements arising due to the evolving role of the entities in conducting the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC).
Need for enhancing the effectiveness of IPE
- To furnish support services to individual Insolvency Professionals (IPs) who hold the status of a partner or director within the organization.
- To restrict multiple partnerships or directorships with IPEs.
- To enhance the efficacy of the regulatory framework governing IPEs enabling IPEs to perform their functions more efficiently while remaining compliant with the established regulatory framework.
Issues Covered in the Paper
This paper covers the following issues:
- Monitoring of IPE acting as IP
- Related Party Definition for an IPE acting as IP
- Restriction on the number of Assignments by an IP
- Minimum Fee Structure of an IPE acting as IP
Issue 1: Monitoring of IPE acting as IP
Proposal:
- In case of contravention by the IPE acting as IP, the disciplinary proceeding shall be initiated against the IP who is/has been its authorized signatory for respective assignment(s). Upon initiation of disciplinary proceedings against such IP, the IPE shall not allow him/her to act as an authorized signatory in any new assignment. Such action would not impact the ongoing assignment or status of AFA of the IPE acting as IP or its other partners or directors, as they are separate legal entities from the authorized signatory.
- If there are repeated instances of contravention or disciplinary proceedings against one or more partners or directors of the IPE acting as IP, the disciplinary proceeding may also be initiated against the IPE acting as IP on a case-to-case basis. However, such action would not impact the status of AFA of other partners or directors of the IPE.
Issue 2: Related Party Definition for an IPE acting as IP
Proposal:
To meet the intended objective of making use of the potential institutional and multidisciplinary structure of IPEs, the partner or director of the IPE acting as IP may be excluded from the definition of related party for clauses 23B and 23C of Code of Conduct specified in IP Regulations, except for the services related to valuation and auditing.
Issue 3: Restriction on the Number of Assignments of an IP
Proposal:
It is proposed that clarification under clause 22 of the Code of Conduct specified in IP Regulations may be modified to include the following:
- For IP who is an individual: Overall limit of 10 assignments at any point of time, out of which not more than 3 shall have admitted claims exceeding INR 1000 crore each. The overall limit includes all the assignments of an IP.
- For IP which is an entity:Overall limit of 5 assignments per partner or director who are IPs holding AFA, at any point of time (excluding the assignments taken by an IP in his capacity). However, the number of assignments for an IPE acting as IP at any point in time shall not be more than 15 assignments having admitted claims exceeding INR 1000 crore each. The overall limit includes all the assignments of an IPE acting as IP.
Issue 4: Minimum Fee Structure of an IPE registered as IP
Proposal:
It is proposed to clarify that the existing fee structure is applicable for individual IP only and shall not be applicable in the case of IPE acting as IP.
The Board also solicits comments on the draft amendments to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017.
The link to the aforesaid Notification is as follows:
https://ibbi.gov.in/uploads/whatsnew/cff92741c41ddc4b0a5e81d9ff4063c2.pdf
4. Discussion Paper on Strengthening the Liquidation Process
On October 20, 2023, IBBI issued a Discussion Paper on ‘Strengthening the Liquidation Process’. The following proposals are provided in the paper:
- The auction notice shall provide that the prospective bidders shall undertake that they are eligible under section 29A of the IBC, 2016 to participate in the auction process. It shall also provide that in case the bidder at any stage during the auction is found to be ineligible, his EMD shall stand forfeited by the liquidator.
- To ensure confidentiality of the names of prospective bidders participating in the auction process, how earnest money is to be deposited by prospective bidders shall be notified through a Circular by the Board.
- The Liquidator shall within 3 days of declaration of H1 bidder conduct due diligence and verification of the eligibility of the bidder, who stood as the H1 (highest) bidder in the auction process.
- The liquidator shall place before the Stakeholders’ Consultation Committee (SCC) for its consideration under regulation 31A the result of the auction, the details of the highest bidder, due diligence conducted by him on its eligibility, and the result of such due diligence. In case the highest bid above the reserve price is not acceptable for any reason to the liquidator, the consultation with SCC shall be mandatory.
- Reserve price in an auction is reduced by a maximum of 10% at a time.
- The liquidator may sell the assets of the Corporate Debtor (CD) by means of private sale only after the prior consultation with SCC and the successful buyer shall also be confirmed after such consultation.
- The regulations may provide that the liquidator should list all assets of the CD as per the Asset Memorandum, on a listing platform in the manner to be notified by the Board, which would significantly improve the visibility of assets, reduce information asymmetry and simplify the process for potential bidders. Each asset listed should contain all material information about the assets such as status of attachment or lien, geographic coordinates, envisaged mode of sale, and likely date of auction. By listing assets much earlier than the auction date, the process would ensure greater engagement for the prospective bidders and the availability of more time with bidders for due diligence, leading to more competitive bidding.
- The progress reports shall also be shared with the SCC.
- No period will be allowed to be excluded on account of inability to sell assets because of any litigation. Renegotiation of fees with SCC will be permitted in cases where fees are unviable because the majority of assets being under litigation.
- The Liquidator shall be mandated to hold meetings of the SCC in such a way that the interval between 2 consecutive meetings does not exceed 30 days.
- The Liquidator shall seek suggestions/observations of the SCC on the draft preliminary report and finalize it, after considering such suggestions/observations, and thereafter, submit it to the Adjudicating Authority (AA), Board, and members of SCC.
- The liquidator to place the reason for liquidation cost exceeding the estimates of liquidation cost before SCC and discuss ways to rationalize the same by presenting cost and benefits analysis of various expenses:i) if it exceeds the estimated cost mentioned in the preliminary report or.ii) if it exceeds 10 percent of the liquidation value of the CD.
- The liquidator shall facilitate a meeting wherein registered valuers shall explain the methodology being adopted to arrive at valuation, to the consultation committee before finalisation of valuation reports.
- The Liquidator shall share the valuation report with the SCC members.
- In all cases where the liquidator proposes to continue or initiate any legal proceeding before any authority, he shall seek the advice of the consultation committee, upon its reconstitution as per Regulation 31A, after presenting the economic rationale for the proposal. The consolidated status of all the legal proceedings shall be placed before the consultation committee in its every meeting.
- In the event the running of business of the CD is economically unviable, the liquidator shall consult the SCC, to decide whether to keep the CD as a going concern or otherwise. In case, the SCC decides not to run the business of the CD as a going concern, the liquidator shall act as per the advice of SCC.
- Where the liquidator is unable to sell the CD as a going concern though the business of the CD is running as a going concern, he shall inform the reason for such failure to SCC and seek its advice to review the marketing strategy already adopted for the previous auctions, to attract potential bidders in future auctions.
- Form H to capture other details regarding the realization and distribution made during the process.
- A liquidator may assign assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions referred to in sections 43 to 51 and section 66 of the Code even before the adjudication of such proceedings by the AA.
- Before applying to the AA for early dissolution under this regulation, the liquidator shall mandatorily consult the SCC to seek their views and recommendations. The liquidator shall provide a detailed report of the consultation and the views of the SCC in the application to the AA.
- Where a request for withdrawal is received from the claimant, the Board shall direct the liquidator in all such cases where a dissolution order or process closure order has not been passed, for verification of the claim. This includes checking the legitimacy of the claim, the amount involved, and any other relevant details. Post verification, the liquidator shall submit their findings and opinion to the IBBI to enable it to permit withdrawal even before dissolution.
The link to the aforesaid Notification is as follows:
https://ibbi.gov.in/uploads/whatsnew/b3f9d9e4145dee5cb50dc46b8efe3b00.pdf