Syllabus: GS3/ Economy
Context
- The Insolvency and Bankruptcy Board of India (IBBI) has proposed four key amendments to strengthen safeguards for creditors in insolvency resolution proceedings involving personal guarantors to corporate debtors.
Background
- Under the Insolvency and Bankruptcy Code, 2016 (IBC), a personal guarantor who guarantees the debt of a company can be subjected to insolvency proceedings when the corporate debtor defaults.
- The framework seeks to balance creditor recovery, debt resolution and protection of the guarantor’s legitimate interests.
- However, the rules governing personal guarantors currently provide weaker safeguards for creditors than those available under the Corporate Insolvency Resolution Process (CIRP).
Key Amendments Proposed by IBBI
- Related Parties to be Barred from Voting: Creditors who qualify as related parties of the personal guarantor would be excluded from voting on the repayment plan.
- At present, the personal-guarantor framework bars an associate from voting, but the definition of an associate is narrower than that of a related party.
- Greater Scrutiny of Avoidance Transactions: Resolution professionals would be required to examine whether the guarantor was involved in preferential, undervalued or extortionate credit transactions during the relevant period.
- Their findings would have to be placed before creditors before they vote on the repayment plan.
- With creditor approval, the resolution professional would also initiate appropriate legal proceedings in cases involving such transactions.
- Independent Valuation of Assets: A registered valuer would be appointed to determine the fair value and realisable value of the guarantor’s assets.
- The valuation report would be submitted to creditors along with the repayment plan.
- Recording Reasons for Creditors’ Decisions: Resolution professionals would be required to record the deliberations and reasons behind creditors’ decisions rather than merely recording voting results.
Insolvency and Bankruptcy Code (IBC) 2016
- IBC was introduced in 2016 to address rising Non Performing Assets and ineffective debt recovery mechanisms in India.
- Objectives of the IBC resolution are;
- Business Revival: To save businesses through restructuring, changes in ownership, or mergers,
- Maximization of Asset Value: To preserve and maximize the value of the debtor’s assets,
- Promoting Entrepreneurship and Credit: To encourage entrepreneurship, improve credit availability, and balance the interests of stakeholders, including creditors and debtors.
- Currently a maximum 330 days is allowed to find a resolution for a company admitted into the insolvency resolution process.
- Otherwise, the company goes into liquidation.
Institutional Framework
- Insolvency and Bankruptcy Board of India (IBBI): The apex regulatory body established to oversee the functioning of insolvency professionals, insolvency professional agencies, and information utilities.
- National Company Law Tribunal (NCLT): The adjudicating authority responsible for admitting insolvency petitions, declaring moratoria, and approving resolution plans for companies and LLPs.
- Insolvency Professionals (IPs): IPs administer the affairs of distressed entities, safeguard assets and facilitate meetings of creditors. They oversee the resolution process in compliance with the Code and applicable regulations.
- Committee of Creditors (CoC): The supreme decision-making body comprising the distressed entity’s financial creditors. They evaluate, vote on, and approve the resolution plan.
Source: IE
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