The Corporate Affairs Ministry (MCA) appointed Insolvency Laws Committee (ILC) has recommended that a clarificatory amendment be introduced in Insolvency and Bankruptcy Code (IBC) to provide that the proceedings relating to “avoidable transactions” and improper trading can continue even after the completion of a Corporate insolvency resolution process (CIRP).
In its fifth report, which has now been made public, the ILC headed by MCA Secretary Rajesh Verma highlighted that there is currently lack of clarity on whether proceedings for avoidance transactions and improper training can continue after the completion of CIRP or not .
Avoidance transactions
Under IBC, avoidance transactions are recognised as undervalued, fraudulent or extortionate by the previous promoters.
The report has also recommended that suitable amendment be made to IBC to ensure that the resolution plan provides sufficient clarity for the smooth conduct of proceedings for avoidable transactions or improper trading.
This recommendation forms part of the 11 key recommendations that the Panel has made in its report to improve the effectiveness of IBC.
Vishwas Panjiar, Partner, Nangia Andersen LLP, said this proposal on avoidable transactions is specifically intended to impart clarity and counter recent decision of the Delhi High Court in the case of Venus Recruiters Private Limited wherein the Court had held that such application (on avoidable transaction) do not survive beyond the conclusion of CIRP.
Other recommendations
The ILC has also recommended introducing a timeline for approval or rejection of resolution plan submitted to the Adjudicating Authority (AA). It has recommended that AA should dispose the resolution plan within 30 days of receiving it or record reasons in writing if it fails to dispose the plan within this timeline.
To expedite the process of proving default and consequently avoid delays in admission of CIRP applications, the ILC has recommended that certain financial creditors should be mandated to submit (with their CIRP application) records that have already been authenticated by Information Utilities (IU). In such case, the Adjudicating Authority (AA) should not seek any other documentation for proving default. A similar mandate may be extended to operational creditors in due course of time, the Panel has said.
Another interesting suggestion made by the ILC is proposed change in threshold date for look-back period of avoidable transactions. It has been recommended that the threshold date should be changed to the date of the filing of application for initiation of CIRP instead of the date of commencement. Accordingly, transactions from the date of filing until the date of commencement will also be included in the look-back period. This proposal is intended to discourage any perverse incentives for corporate debtors to delay the admission of CIRP applications.
Reviewing late submissions
The Committee has also recommended that a mechanism for reviewing late submissions of resolution plans and unsolicited revisions to plans be laid down in the regulations. Pursuant to the recommendations of the Committee in this regard, some amendments have already been carried out in the CIRP regulations.
Panjiar said the proposals with respect to use of IU authenticated records by certain financial creditors at the time of admission and the 30-day time limit for approving/rejecting resolution plan has the potential of drastically reducing time taken for resolution.
Also, imparting clarity with respect to maintainability of proceedings for avoidable transactions and/or improper trading and changes in the threshold date for look-back period should serve as a necessary deterrent against any misadventures to unnecessary delay the admission process. “The proposals, if implemented, would have far wider ramifications and would play an important role in meeting the intended objective of the IBC,” he said.
Anoop Rawat, partner (insolvency & bankruptcy), Shardul Amarchand Mangaldas & Co, said the fifth report of ILC contains guidance and clarifications on certain issues in addition to suggesting changes for the amendment to the Code.
The notable suggested changes to the Code are mandatory use of IU record of default, extending the look back period, continuation of proceedings on avoidance transactions, timeline for approval of plans by Adjudicating Authority and contribution by creditors during liquidation process.
The notable guidance and clarification are guidance to IBBI to issue standard conduct for CoC, management of conflict of interest etc. “The report of ILC is a very well thought report and tackles practical issues faced in Implementation of IBC cases”, Rawat added.