Amendment in IBBI Regulations 2016

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    Recently, the Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

    About

    • The amendments were aimed at enhancing the discipline, transparency, and accountability in corporate insolvency proceedings.
    • In March 2021 a sub-committee of the Insolvency Law Committee (ILC) recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.

    Key Amendments

    • The new regulations for the insolvency resolution process for corporate persons allow the RP to appoint any professional, including registered valuers, to assist him in the discharge of his duties during the corporate insolvency resolution process (CIRP).
    • Such appointments shall be made at arm’s length, following an objective and transparent process. The invoice for the fee shall be raised in the name of the professional and be paid into his bank account.
      • CIRP includes necessary steps to revive the company such as raising fresh funds for operation, looking for a new buyer to sell the company as a going concern, etc.
    • The Resolution professionals (RPs) will be required to inform the adjudicating authority about avoidance transactions of a corporate debtor.
      • RPs has to disclose all former names and registered office addresses changed in the two years preceding the commencement of insolvency, along with the current details.

    Significance

    • It would allow stakeholders to claw back lost value and would disincentive stakeholders from entering into such transactions.

    Concerns

    • The adherence to these timelines will largely depend on the availability of adequate data and information required for the assessment of these transactions.
    • In large cases, the personnel, directors, and promoters do not give adequate cooperation for ensuring the availability of the necessary information and data. The process of cooperation and issue of direction by the NCLT is not fast enough to meet the strict timeline prescribed for the assessment and determination of avoidance transactions.

    Insolvency and Bankruptcy Code (IBC) 2016

    • Aim: It provides for a time-bound process to resolve insolvency and is applicable to companies, partnerships and individuals.
      • When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency.
      • Both debtor and creditor can start ‘recovery’ proceedings against each other.
    • Timeframe: It prescribes a maximum period of 330 days for a resolution as per an amendment introduced in 2019.

    Key components of IBC in resolution process:

    • Insolvency Professionals: These administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
    • Insolvency Professional Agencies: These conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
    • Information Utilities: Creditors report financial information of the debt owed to them by the debtor. Such information includes records of debt, liabilities and defaults.
    • Adjudicating authority: The proceedings of the resolution process is adjudicated by:
      • National Companies Law Tribunal (NCLT) for companies and limited liability partnerships.
      • Debt Recovery Tribunal (DRT) for individuals.
    • Insolvency and Bankruptcy Board: It regulates insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
    • It consists of representatives of the Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.
    • Committee of creditors (COC): It consists of the financial creditors who lent money to the debtor.
      • It decides the future of the outstanding debt owed to them.
      • They may choose to revive the debt owed to them by changing the repayment schedule or selling the assets of the debtor to get their dues back.
      • If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
      • The minimum vote required to approve the resolution plan is 75% in a meeting of COC.
    • Order of proceeds from sale: If a company goes under liquidation, Proceeds from the sale of the debtor’s assets are distributed in the following order.
      • First: Insolvency resolution costs, including the remuneration to the insolvency professional,
      • Second: Secured creditors, whose loans are backed by collateral
      • Third: Dues to workers, other employees,
      • Fourth: Unsecured creditors.
    • Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
    • Bankruptcy is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. 

    Source: IE

     

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