The Insolvency Law Committee (‘ILC’), set up by the Central Government published its 5^th report on June 15, 2022 (‘Report’) on various issues relating to implementation of the (Indian) Insolvency & Bankruptcy Code, 2016 (‘Code’). The Report proposes various amendments to the Code and the rules and regulations thereunder, to improve efficiency of the corporate insolvency resolution process (‘CIRP’) and liquidation processes under the Code. These recommendations will be considered by the Parliament before making any legislative amendments.

Please see below a summary of the key recommendations in the Report –

1.     Certain Financial Creditors (‘FCs’) Mandated to Submit Record of Default Filed with Information Utility/ies (‘IU’)

The ILC has recommended that Code applications filed by FCs that are ‘financial institutions’[2] and such other categories of FCs as notified by the Government should be accompanied by records of default filed with IU, and should be disposed off based on such record, speedily and with limited review, to expedite disposal of cases filed by such FCs. Where such IU authenticated records are not available, and for all other FCs, current options of relying on different documents for establishing default may remain available. This is likely to significantly reduce the time taken for admission of cases filed by FCs.

2.     Curbing Submission of Unsolicited Resolution Plans and Revisions of Resolution Plans

The ILC observed the divergent market practices regarding the timeline and manner of submission of resolution plans [4]. For instance, the Committee of Creditors (‘CoCs’) have been known to consider bids or increased offers even after the deadline for receipt of resolution plans has expired. Such practices lead to inconsistencies, delays, and lack of procedural sanctity. The ILC noted the significance of balancing the principles of value maximization and sanctity of the CIRP.

The ILC has recommended that regulations should clearly lay down a mechanism for reviewing late submissions of (or revisions to) plans and suitable amendments should also be made in the Code to ensure that the prescribed procedure has due sanctity.

It was discussed that the CIRP regulations may allow the CoC to opt for a Swiss challenge method for considering plans and revisions to plans submitted after the deadline in the Request for Resolution Plan (‘RFRP’), detailed mechanics of which may be set out under the RFRP. Further, the CIRP regulations and RFRP may require the CoC to specify the number of revisions that are permissible to resolution plans along with necessary timelines.  Lastly, the ILC noted that the CoC should provide a reasonable time period for the submission of resolution plans, in order to provide participants with a fair opportunity to submit their plans before the deadline.

3.     Continuation of Proceedings with respect to Avoidable Transactions and Improper Trading after Completion of CIRP

The resolution professional is required to initiate recovery actions in respect of certain avoidable or fraudulent transactions undertaken in the lead up to insolvency. However, there are divergent case laws on whether such proceedings abate after approval of the resolution plan and on who is entitled to the recoveries.

It is recommended that:

(a)     A clarificatory amendment may be made to Section 26 of the Code, permitting continuation of avoidance proceedings beyond the timeline for CIRP and approval and/or implementation of a resolution plan;

(b)     Amendments should be made to the Code to mandate that resolution plan/s specify the manner of undertaking proceedings for avoidance transactions if such proceedings are to be continued after approval of the plan, including specifying details such as the person who will continue to pursue such proceedings and the manner of payment of the costs of such proceedings; and

(c)     The resolution plan should also provide the manner of distribution of expected recoveries and the preservation of claims of expected beneficiaries, if such preservation is required, according to the commercial wisdom of the CoC. The Adjudicating Authority should have regard to the decision of the CoC regarding the manner of distribution of expected recoveries when giving final orders in proceedings for avoidance of transactions and improper trading.

4.     Revision in Threshold Date for Look-back Period

The ILC recommended that the threshold date for the look-back period with respect to avoidable transactions under the Code should be the date of the filing of application for initiation of CIRP, i.e., the initiation date, and further transactions from the initiation date until the insolvency commencement date should also be included in the look-back period.

5.     Timeline for Approval or Rejection of Resolution Plan

The ILC noted the delays in the disposal of resolutions plans submitted to the NCLT which can be attributed to (a) a high number of objections to the proposed resolution plan; or (b) due to a high degree of pendency of cases. The ILC has recommended that amendment/s should be made to Section 31 of the Code to provide that the NCLT should dispose of applications for approval of resolution plan/s within 30 days of receiving such applications, and record reasons in writing if it fails to dispose of the plan within this timeline.

6.     Standard of Conduct for CoC

Given the pivotal role of the CoC, the ILC recommended that the Insolvency and Bankruptcy Board of India (‘IBBI’) should issue guidelines that provide the standard of conduct for members of the CoC while acting under various provisions under the Code. This may be in the form of guidance that provides a normative framework to members of the CoC about the manner of conducting themselves in processes under the Code, with appropriate amendments to Section 196 of the Code to empower IBBI to issue such guidelines.

7.     Secured Creditor’s Contribution

Secured creditors are permitted to step out of the liquidation process by choosing to realise their security interest outside instead of relinquishing it. The Code provides that secured creditors opting to realise their security interest outside the liquidation process are liable to contribute towards CIRP costs. ILC has recommended that such secured creditors should also be required to contribute towards workmen’s dues in the same manner as they would have if they had relinquished their security interest. Where a secured creditor fails to make the required contributions recommended above, its security  interest should be deemed to be relinquished and made a part of the liquidation estate

8.     Termination of Voluntary Liquidation Process (‘VLP’) before Dissolution

ILC recommended that a simple mechanism for terminating a VLP which is akin to the mechanism for commencement of the process may be provided under Code.

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[1] The Report is available on IBBI website at https://ibbi.gov.in/uploads/resources/f841a45902d901ef311fe6d76127d094.pdf

[2] Not defined, but commonly understood to mean banks, notified non-banking financial companies, asset reconstruction companies, etc.

[3] ILC noted the ruling of the Delhi High Court in Venus Recruiters Private Limited v. Union of India.

[4] In some cases, revisions are made to submitted resolution plans in an attempt to outbid other potential resolution applicants. In certain cases, Tribunals have directed the resolution professional or the CoC to consider a resolution plan submitted beyond the stipulated deadline, by giving precedence to the principle of maximization of value. Conversely, in some cases tribunals have upheld the sanctity of the timelines provided under the Code and regulations framed thereunder.