Abstract: In this opinion piece, we have discussed the relevant suggestions made in IBBI’s discussion paper dated 27.06.22 and what would be their impacts/benefits on corporate insolvency practices.
As per the Insolvency & Bankruptcy Board of India’s (IBBI) data, only ₹2.5/₹7.52 lakh crore of creditors’ claims has been realised under IBC, casting a light on the massive losses that banks have incurred. Just 14% of the 5,258 cases were resolved via resolution plans approved by the lenders, while 47% ended in liquidation. Approx 66% of pending cases surpassed 270 days (well beyond the stipulated time limit of 90days) and in some cases, banks have taken a haircut as high as 90% in Q4 FY2022!
To ameliorate this abysmal condition, IBBI, on 27th June rolled out a discussion paper suggesting changes in the persisting corporate insolvency resolution process to strengthen processes under the CIRP Regulations for securing better value for stressed assets and cut down on delays in the insolvency resolution. Particular important suggestions as submitted by the paper are as follows:
1. Proposed Changes in Order of Activities and Time Limit for Completion
Proposed Change: At the time of inviting EoI, per se, there is no need for an Information Memorandum (IM) because at this stage just the basic information of the corporate debtor is required to be given for inviting EoI. This change will allow inviting EoI much earlier.
Benefit: The process of identifying Potential Resolution Applicants (PRAs) will earlier get sufficient time for the 2nd iteration if enough applicants are not recognised in the 1st iteration.
Proposed Change: As observed by IBBI, Resolution Professionals (RPs) are unable to ready and submit the IM to the Committee of Creditors (CoC) within the present prescribed limit of 54 days from the insolvency commencement date (ICD) because of the “lack of information, incomplete books of accounts, non-cooperation from promoters”, etc. Thus, it is proposed that the submission limit IM should be increased from 54 to 95 days from ICD.
Benefit: IM is the core document on the basis of which resolution applicants (RAs) make resolution plans and the info gathered in it has a bearing on the valuation of assets. Further, it is critical info for having any opinion on avoidance transactions and for transaction auditors to get audit reports.
Proposed Change: Under the present timeline, the filing avoidance application clashes with the date for submission of the resolution plan. It’s proposed to reduce the time for filing avoidance applications from T+135 to T+130.
Benefit: RAs will be able to consider the amount to be recovered from avoidance transactions application, etc (which are also the assets of CD) at the time of submitting the resolution plan.
2. Marketing of Assets by RP for Increasing CD Value
Obtaining max value for the assets of CD is the hallmark of a good CIRP and it is only possible when there are various competing resolution plans. Targeted outreach efforts need to be made publicising assets’ info for it to reach a wider pool of relevant audiences and PRAs to bring competition in the biddings.
Proposed Change: During the phase when EoI is issued, RP shall prepare a strategy to market the assets of the CD (where total claims > 100 crores) which may include:
- Proposed advertising platforms and other platforms where the EoI can be marketed,
- Professional services required for the same
- Costs are involved in the entire endeavour.
RP (in consultation with the CoC) will finalise the plan and publish the EoI of CDs on multiple public forums. Plus, for better market discovery, CoC member banks can also publicise the request for a resolution plan (RFRP) among their borrowers. Accordingly, the insertion of Regulation 36C “Strategy for marketing of assets of the corporate debtor” is proposed to be inserted.
Benefit: Securing max. value for the assets of CD through price discovery in competitive bidding amongst PRAs.
3. Efforts for Resolution of Functional/Operating Parts of the CD
According to the 32nd Report of the Standing Committee on Finance, bidders may be more interested in particular assets or business units than the entire business. CDs have functional as well as non-functional assets in various locations spread across the globe. In such situations, the interested PRAs for functional assets or assets at a particular location/business are uninterested in the others. Further, the demand for extra investment for non-functional assets or of a particular location/business becomes too high and hence the PRAs are unwilling to put in a resolution plan. And due to this, insolvency proceeds are far less than expected.
In liquidation, assets are sold in parts but not in the CIRP stage, though there is a significant drop in price. However, concern that the liabilities of the CD may all be transferred to certain assets/units while certain assets are kept unencumbered by design and are taken over by a targeted resolution plan will be required to be addressed.
Proposed Change: CIRP Regulation provisions, which provide for the re-issue of RFRP, the RP and CoC would be allowed to analyse resolutions of part assets/businesses by allowing submission of separate resolution plans for them, when the amended RFRP and thereafter evaluation matrix is issued. This can be done when PRAs expressed interest at the EoI stage and no resolution plans were received afterwards. Accordingly, the insertion of Regulation 37A “Resolution of assets of the corporate debtor” is proposed.
Benefit: Higher liquidation proceeds by allowing different resolution plans for particular assets and assets/businesses at particular locations that are higher in demand.
4. Parameters for the CoC for Early Liquidation Decision
In many CIRPs, CDs have stopped operating or have no assets or meagre assets, and in extreme situations, have no office and exist merely in files. In such situations, the RP and the CoC have no option but liquidation. However, even in such grave situations, RP first attempts for resolution before applying for liquidation even when the chances are infinitesimal. This increases the procedural cost creditors in paying to the RP and also delays the liquidation causing a fall in CD’s assets’ value. Therefore, there is a need for certain guidelines to avoid such scenarios and facilitate the CoC to come to an early decision. These can be a part of recommendations to the Adjudicating Authority (AA).
Proposed Change: Regulation 40D, “Decision for liquidation”, is proposed to be inserted in Regulations laying down certain parameters for CoC to consider for deciding on liquidation in the initial stages of CIRP like, inter alia:
- CD being defunct for 3-5 years
- Outdated product offerings of CD
- Outdated technology
- Lack of intangible assets like renowned trademark, goodwill, etc
- Accumulated losses/depreciation,
- Nascent investments, etc.
Benefit: Timely and objective decision-making on the part of CoC and better scope of getting maximum value for assets of the CD.
5. Exploring Compromise Arrangement After CoC Approves Liquidation
When the liquidation process starts, at first, the Liquidator attempts a compromise u/s 230 of the Companies Act, 2013 and for it, a 90 days period from the date of liquidation commencement is prescribed, which is proposed to be cut down to 30 days. And when the CoC decides upon liquidation and the RP files for it, the approval of AA is required for the same. In the meantime, the CIRP is put off and the value of assets keeps falling.
The assets can be put out in the market for sale only when the liquidation kick starts. For optimal use of time and for keeping the assets in the market, it is proposed that if CoC and RP decide on a compromise/arrangement, this 30days period should be utilised for weighing this option. In case an arrangement is reached, the liquidator can, after AA’s order, immediately file an application for compromise/arrangement.
Proposed Change: In the meantime, till AA gives green light to the liquidation, RP and CoC should start considering the option of compromise/arrangement and if the same is materialised, the RP/CoC can seek approval for the arrangement instead of the liquidation order. Accordingly, insertion of Regulation 39CA, “Assessment of compromise or arrangement”, is proposed.
Benefit: The most lucrative arrangement is implemented without shutting down the business.
6. Contents of IM
The requisite content of the IM is provided under Regulation 36. Though, as observed by IBBI, Insolvency Professionals (IPs) and CoC do not make the required efforts in the preparation & approval of the IM. This limits (and in some cases, complete loss of) the information available to the RAs.
Not to mention, in CIRP, IM should be viewed as the beginning point of marketing endeavours for CD’s assets and in this context, is equivalent to a red-herring prospectus for listing of assets. At present, IMs do not represent the USPs of the CD and do not provide clarity pertaining to the CD’s strengths and potential.
Proposed Change: The RP, to give a limpid view of the CDs business performance, should clearly mention in the IM “business evolution details, key contracts, industry overview including sector fundamentals, key growth drivers, projected business plan, key investment highlights” etc. IMs should encompass details that can pull PRAs like “bringing forward losses in the income tax returns, input credit of GST, key employees, key customers, supply chain linkages, utility connections and other infrastructure facilities” and other systems that consume a lot of bandwidth to set up from scratch. Accordingly, an amendment in Regulation 36(2) is proposed.
7. Dealing with Third-Party Assets as a Part of the Insolvency Process
In many CIRPs, the manufacturing unit or other facilities are built and the plant & machinery of the CD is on third-party land. But the lease confers upon the CD the right to use the land for a specified time period and this right is transferable under the law to the RA by way of an approved resolution plan.
However, as assets are on a third-party land, the RAs are wary of bidding as this right to use may be contested and leads to costly litigation on frivolous grounds by such a third party. This has discouraged and disincentivized several RAs from submitting resolution proposals even when CDs are feasible. Such problems are also difficult to solve as the land is included in the resolution estate.
Proposed Change: Promoters’/guarantors’ assets without which useful resolution is impossible and which are “already mortgaged/charged to creditors for securing the loan of the CD” can be made part of the resolution estate with the consent of the mortgagee/charge holder (the creditor). Accordingly, Regulation 35AA, “Relinquishment by charge holder”, is proposed to be added under Regulations.
8. Immovable Assets’ Geo-tagging
CD’s assets’ inventory and their details make the foundation for activities like valuation, incorporating details in IM, managing these assets and sorting any litigation on them. But as observed in many cases, the information on CDs’ assets is incomplete and the IP has to build the information after he takes over. To bolster the information base on assets and make it more holistic pertaining to the title and rights of the assets, RP should utilise modern geotagging technology to mark immovable assets. This can be a part of the valuation work and the IM so that the CoC and RAs can make better-informed choices.
Proposed Change: IP shall geotag assets with fixed locations and enclose such information in the IM. Accordingly, an amendment to the explanation under Regulation 36(2)(a) is proposed.
9. Discussing Valuation Report with CoC
It is explicitly in the CIRP Regulations to share the valuation report with the CoC when the resolution plans have been received and before this stage, the CoC has very little knowledge of the Fair value and Liquidation value. And for all practical purposes, they decide the PRA’s eligibility and evaluation criteria with such limited knowledge. Giving CoC access to the valuation documents would enable them to make better-informed decisions, enhance IM and decide whether a third valuer is required. It will also facilitate CD’s better price discovery. Accordingly, the confidentiality agreement has to be taken earlier from the CoC.
Proposed Change: Along with the resolution plan, CoC shall be allowed an opportunity to understand valuers’ methods, assumptions, and justifications, by way of interaction, so that a genuine valuation gets accepted. Accordingly, Regulation 35(2A) is proposed to be added to CIRP Regulations.
Benefit: Better chances of the resolution of the debt as the decision-making between the CoC and valuers will be more cordial.
10. Re-Running the Valuation Exercise
For the first time, the valuation exercise is run on ICD to determine the Fair and the Liquidation value. But the possibility is that the economic valuation of assets has eroded over time due to multiple reasons like the COVID-19 pandemic, obsolescence of technology, termination of business as a going concern, etc. It’s observed in various cases where RAs withdraw/modify the plans due to the change in the market scenario as a long time has passed since the proposal was made.
As per experts, the validity of a valuation report is 6-9 months and after that, market conditions may be different than under which the valuation was done. Thus, running the 2nd valuation exercise is necessary during CIRP.
Proposed Change: On the behest of CoC, a 2nd valuation exercise can be undertaken where CIRP has breached the time limit of 330 days because of tumultuous market conditions, legal stalemate or force majeure conditions.
Proposed Change: In the present regime, dissenting FCs’ payment is linked to the amount owed to them in the event of liquidation (a notional amount), which shall be linked to the “realisable amount in case of liquidation when the resolution plan has been approved”. Further, while ensuring no malicious incentive for dissent, to protest the interest of minority dissenting FCs, they should be paid as per 53(1), Resolution plan value. Accordingly, a definition of “realisable amount in the event of liquidation when the resolution plan has been approved” as S.2(1)(ka) is proposed to be added to CIRP Regulations.
Benefit: Protection of interest of genial minority dissenting FCs and fair value distribution as laid down in the Code. Any perverse incentive for dissenting FCs will stand countered.
13. Process Email
IRPs invite claims via public announcement where he provides his/her email address. Claimants send claims on this email even after the IRP vacates the office and the RP comes in. This mandates the IRP to promptly share the information received to the RP, defaulting which claims may go unaddressed triggering avoidable ramifications for the claimants and even causing litigations.
Proposed Change: There should be a standard email address created by IRP whose credentials will be handed over to RP as IRP leaves office. Similarly, RP handover the credentials to the other RPs or to the Liquidator as the case may be.
Benefit: No unnecessary delay in accessing information and causing avoidable ramifications flowing thereby. Smooth transfer of office to RPs or to any other professional who takes on CIRP.
14. Need for IRP /RP to Communicate to Call Creditors to Submit Claims
A common instance in real estate insolvencies, where allottees don’t have frequent interaction with CD, is that the claimant/creditors are unable to file claims for reasons like incomplete information about the CIRP. However, the CD has their information with him. Thus, the need for timely informing creditors about the ICD and the last date for filing of claims arises.
Proposed Change: IRP shall convey the ICD, last date of submission for claims and all other relevant details in the public announcement to all creditors. Accordingly, it is suggested that the IP Division Circular dated 3rd January 2018 regarding the same should be anchored to the IPs’ Code of Conduct.
Benefit: This will facilitate the timely completion of CIRP by eliminating trivial hassles for creditors/claimants.