Note on Amendments to CIRP and Liquidation process
The Insolvency and Bankruptcy Board of India (IBBI) published discussion papers soliciting comments on issues relating to the corporate insolvency resolution process (CIRP Discussion Paper) and liquidation process (Liquidation Discussion Paper) on 27 August 2021. The IBBI on 30 September 2021 introduced amendments to the IBBI (Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations).
The key changes introduced under the CIRP Regulations and Liquidation Regulations are mentioned below:
1. CIRP Regulations
(i) The CIRP Regulations now mandate the members of the committee of creditors (CoC) to discharge their functions in line with the guidelines to be issued by the IBBI to increase accountability and responsibility of CoC and to ensure transparency in its functioning.
(ii) The CIRP Regulations did not prescribe and limit the number of times an invitation for expression of interest from resolution applicants to submit resolution plan was permitted by the resolution professional. Pursuant to this amendment, such modification to the invitation for expression of interest cannot be made more than once. Similarly, the resolution professional can now modify the request for resolution plans from the resolution applicants only once.
(iii) Further, the amendment has also restricted the number of times a resolution plan may be modified. The CIRP Regulations now provide that a resolution professional may allow modification of a resolution plan not more than once. The resolution professional may use a challenge mechanism to enable improvement of the resolution plans to further the object of maximising the value.
(iv) In order to address the issue of delays during the corporate insolvency resolution process, the CIRP Regulations now prevent the CoC from considering resolution plans that are received after the prescribed timelines or received from someone outside the final prospective resolution applicants’ list or is not in accordance with law.
2. Liquidation Regulations
(i) Under the Liquidation Regulations, a stakeholders’ consultation committee (SCC) is required to be constituted by the liquidator with respect to sale of assets of the corporate debtor. In the Liquidation Discussion Paper, it was proposed that the liquidator must consult the SCC for all significant steps relating to the liquidation process. In line with the proposal, the Liquidation Regulations have now been amended to provide that the SCC can advise the liquidator on matters relating to sale of assets including manner of sale, pre-bid qualifications, reserve price, amount of earnest money deposit, and marketing strategy.
(ii) Further, the Liquidation Discussion Paper also highlighted the issue faced by stakeholders during the constitution of the SCC where the regulatory framework did not provide specific criteria and procedure for nominating the representatives by stakeholders. The Liquidation Discussion Paper noted that the stakeholders face stalemate situations due to (a) disagreement between criteria to be followed for nomination i.e., number of claimants or value of claims; and (b) non-participation of few stakeholders in the nomination process. The amendment now has clarified that in the event of failure of nomination of representatives by a stakeholder, such representatives must be selected by a majority of voting share of the class of stakeholders, present and voting.
(iii) The amendment has introduced certain conditions with respect to the participation fee and earnest money deposit requirements during the sale of assets by the liquidator. Now under the Liquidation Regulations, the liquidator cannot require a non-refundable deposit or fee for participation in an auction. Further the amendment also states that the earnest money deposit must not exceed 10% of the reserve price.
(iv) The liquidator is now required to mention the reasons in the following circumstances, in the next progress report: a) does not follow any advice given by SCC and b) rejects the highest bid in the auction process.
The amendments to the CIRP Regulations and the Liquidation Regulations appear to have addressed the issues faced by the stakeholders during the corporate insolvency resolution and liquidation process respectively and streamlined them in accordance with the object of the Insolvency and Bankruptcy Code, 2016 (Code). The amendment regarding the conduct of the CoC reiterates that all decisions must be in accordance with the Code. Also, the Liquidation Regulations now clarify that the primacy is provided to stakeholders with the highest claim. It may also be noted that the IBBI has released a circular dated 30 September 2021 introducing a centralised electronic platform for listing public notices of liquidation assets. This is in addition to the other specified modes of publication as under the Liquidation Regulations. The liquidators are now directed to upload the public notice of every auction of any liquidation asset with effect from 1 October 2021 at www.ibbi.gov.in through their designated login page. This may increase and encourage the participation of more bidders in the auction process.
Author: Renjith Nair
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