IBBI proposes changes in insolvency resolution process regulations

The Insolvency and Bankruptcy Board of India (IBBI) has proposed four changes to corporate insolvency resolution process (CIRP) regulations to reduce delays. Public comments have been invited by May 3 on the proposed changes for which a consultation paper has also been issued by the regulator.

The paper addresses areas such as substantiating default in admitting applications by operational creditors; facilitating information availability to prepare information memorandum and avoidance applications; dealing with avoidance applications after closure of a CIRP; and significant difference in valuation during a CIRP and appointment of a third valuer.

The proposals

Firstly, it is proposed that operational creditors file copies of GSTR-1 and GSTR-3B returns along with the e-way bill as additional documentary evidence which can help establish that the supply of goods and services to the corporate debtor has actually taken place.

Next, to strengthen the information available with the IRP/RP, it is proposed to impose an obligation on the Committee of Creditors (CoC) to provide all the relevant information they possess regarding the assets of the corporate debtor (CD) from independent valuation exercises or stock audits that they may have conducted, and the relevant extracts from transaction or forensic audits.

It has been correctly identified that a significant delay is caused when IRP/RPs are tasked with the duty to collect all information regarding the financial details of the CD which forms the basis for the information memorandum. While there is an obligation on the CD and its promotors, employees etc. to furnish the requisite information, often practically such information is not forthcoming.

Thirdly, under the IBC, the RP or the liquidator is obliged to file applications with the adjudicating authority in respect of avoidance transactions, that is preferential transactions, undervalued transactions, fraudulent transactions etc. found during the CIRP or liquidation process seeking appropriate relief. Often these are not disposed of during the CIRP and remain pending even after the RP is relieved, and sometimes, even after the implementation of the plan. Now, it has been proposed that the regulations be amended to provide that the manner in which avoidance applications and proceedings are to be pursued should be specifically provided in the resolution plan.

Additionally, the regulations provide that the RP shall appoint two registered valuers to determine the fair value and the liquidation value of the CD. Further, it is provided in the consultation paper that if in the RP’s opinion the two estimates are significantly different, then another registered valuer shall be appointed, and the average of the closest of the two shall be considered. To make this process less ambiguous and reduce potential litigation, a threshold of 25 per cent difference for appointing a third valuer has been proposed.

‘Pragmatic’ proposals

This would help reduce the subjectivity in the process and would save crucial time by avoiding challenges on what constitutes a “significant difference”, said Tahira Karanjawala, Principal Associate — Karanjawala & Co.

“The measures proposed are pragmatic and are aimed at lowering the burden on the RPs by making the process of information gathering more robust. The value erosion has also been sought to be curbed,” Karanjawala said.

Pritika Kumar, Founder — Cornellia Chambers, said: “There will be increased efficiency and clarity for the RP which will make the insolvency process more effective and efficient, and it will also reduce the delays and maximise the realisation value during the process.”

Mayank Mehta, Partner, Pioneer Legal, said the resolution professionals have been facing serious difficulties in preparing IM due to non-availability of information and non-cooperation from various stakeholders of corporate debtor (such as promoters, employees, directors, etc.). The proposed introduction of a legal obligation upon these stakeholders, to make information available in a time-bound manner, is an encouraging step and would certainly expedite the preparation of IM and resolution process, Mehta said.

Sushmita Gandhi, Partner, IndusLaw, said the proposal to inter-relate the proof of delivery through the GST regime for registered operational creditor could potentially expedite the process of verification, she added.

As regards the other proposals, they do not introduce any substantial change to expedite/refine these processes. While seeking information from the management has been a long plaguing issue, RPs are often required to approach the NCLT for appropriate orders against the employees/promoters and directors of a corporate debtor to seek cooperation, Gandhi added.