1. Introduction of a Creditor-Led Resolution Process (“CLRP”)

An expert committee of Insolvency and Bankruptcy Board of India was constituted in February 2023, under the chairmanship of Mr. Sudhaker Shukla, to facilitate implementation of framework of a creditor led resolution approach in the existing structure of the Code. The expert committee has published its report dated May 2023, envisaging introduction of a ‘creditor-led’ and ‘out-of-court’ initiated insolvency resolution (“CLRP Report”). The CLRP Report inter alia envisages a ‘debtor-in-control’ model as compared to the existing ‘creditor-in-control’ mechanism under the Code, an ‘out-of-court’ initiation process initiated by unrelated financial creditors and limited role of the Adjudicating Authority established under the Code. The CLRP Report also envisages conversion of a CLRP into corporate insolvency resolution processes (“CIRP”), on failure of the CLRP.

The existing scheme under the Code has encountered delays in numerous CIRPs which has the potential of depleting value of the assets of the corporate entity and causing jitters amongst global investors in participating in the resolution process. Hence, to overcome the existing inefficiencies, there is a need for combining the ‘out-of-court’ process to be led by the creditors with the ‘in-court’ approvals of the Adjudicating Authority, who’s involvement in turn would be limited to specific circumstances prescribed under the Code. The said process will not only witness better cooperation from the corporate debtor due to ‘debtor-in-control’ model but will also witness early initiation of resolution, as the CLRP can be initiated at very early stages of default and the creditors do not have to wait for the account to be turned NPA. While the CLRP Report has provided a detailed process to be followed alongside incorporating the core principles of the Code, it is to be seen to what extent the same is introduced in the Code vide the Union Budget.

2. Mandatory admission on record of default submitted with the Information Utilities

In terms of the provisions of the Code, the Adjudicating Authority shall within 14 days of the receipt of an application filed for initiation of CIRP, shall either admit or reject the said application. However, the Adjudicating Authority takes significant time to adjudicate the CIRP initiation application on account of verifying whether the said entity has defaulted or not. This has led to considerable delay in the admission process, which has not only led to further siphoning off the left over funds of the company by its management (as moratorium would only commence on the admission order) but has also led to deterioration of the assets of the corporate debtor in the meanwhile.

Hence, to absolve the aforesaid issue, the admission process by the Adjudicating Authority requires a swifter process and reliance on an undisputed and reliable source to verify the default committed by the corporate entity. The record of default issued by the IU, holds a crucial role in the insolvency proceedings to establish defaults before the Adjudicating Authority. The mechanism should not only include providing sufficient time and opportunities to the corporate debtor to contest/confirm the information of default submitted by the creditor but should also follow with a proper due diligence by the IU before issuance of record of default. On strengthening the framework of the IUs, the Code is expected to be amended to provide that while adjudicating an application filed under Section 7 of the Code, if record of default is available with the IU, then the Adjudicating Authority shall solely rely on the same for admission/ rejection of the application for initiation of CIRP. Whether the aforesaid mechanism should also be extended for an application filed by operational creditors shall depend on the usage of the IUs by operational creditors while filing an application under Section 9 of the Code.

The aforesaid amendments, if incorporated under the Code, will not only lead to a faster resolution of the admissions of the applications for initiation of CIRP but will also allow symmetry of information in the CIRP.

3. Widening the scope of look-back period for avoidance transactions

The Code provides certain suspect periods/ look back periods for preferential transactions, undervalued transactions and extortionate transactions. In terms of the Code, the look back period for undervalued or preferential applications is one year and two years preceding the insolvency commencement date in case of non-related party and related party respectively. For extortionate transactions, the look back period is two years preceding insolvency commencement date.

The need for increasing the scope of the look back period from insolvency commencement date to the date of filing of the application for initiation of CIRP is primarily to widen the scope of the avoidance applications and to also discourage any actions taken by the management of the corporate debtor to delay the admission of the CIRP application.

As explained above, Adjudicating Authority takes a longer time period to admit or reject a CIRP initiation application. Hence, the existing look back period for the aforesaid avoidance transactions may not be able to capture a significant portion of the transactions that occurred before the filing of a CIRP application. This may diminish the effectiveness of the provisions related to avoidance transactions. Hence, it is expected that the scope of look back period should be expanded to include the period from the date of filing an application for initiation of CIRP to the insolvency commencement date and also counting the look back period with reference to the filing date

4. Introducing the concept of ‘group insolvency’

The provisions of the Code are meant for standalone insolvencies. However, the Adjudicating Authorities have introduced insolvency for companies within a group by allowing substantive and procedural consolidation of group companies depending on the nature of the group, the commonality of the business and lenders and other factors. The pioneer case for the substantive consolidation is insolvency resolution process of the Videocon group entities, where the Adjudicating Authority allowed the substantive consolidation of 13 of the Videocon group entities. Following this precedent, several Adjudicating Authorities have allowed either substantive (resolution of Lavasa entities) or procedural (SREI group entities) consolidation.

With the jurisprudence regarding initiation of insolvencies for companies within a group being established, the Union Budget is expected to officially introduce the concept of ‘group insolvency’ within the Code. However, it is to be seen if the principles behind merging the insolvencies of the group companies would be on any different principles then what have been envisaged by the Adjudicating Authorities.

5. Nullifying the judgement of Rainbow Papers and Vidarbha Industries

The judgements of the Hon’ble Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited (Civil Appeal No. 4633 of 2021) and State Tax Officer v. Rainbow Papers Limited (Civil Appeal No. 1661 of 2020) have led to a precarious position for the stakeholders of the Code. While Vidarbha Industries have interpreted the use of ‘may’ in Section 7(5) of the Code as giving a discretion to the Adjudicating Authority to either admit or reject an application for initiation of CIRP despite existence of default, the Hon’ble Supreme Court in Rainbow Papers has created an ambiguity in the treatment of statutory dues under the Code by interpreting a statutory authority, in whose favour a charge is created under a statute, be treated as a ‘secured creditor’ in terms of the Code. Hence, in order to nullify the effects of the aforesaid judgements, suitable amendments may be carried in the Code.

The aforesaid expected amendments in the 2024-2025 Union Budget would underscore India’s commitment to strengthening the Code as a key tool for economic recovery and growth. By focusing on enhancing maximization of the value of the assets of the corporate debtor, timely resolution of corporate debtors and protecting creditor rights, these amendments have the potential to create a more robust and responsive framework for managing insolvency cases. On the incorporation of the amendments in the Code, the stakeholders will be keenly watching their implementation and impact on India’s economic landscape.

This article was originally published in The Economic Times on 18 July 2024 Co-written by: Anoop Rawat, Partner; Devansh Rathi, Associate. Click here for original article

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