CIRP Assignments For Insolvency Professionals Restricted to 10 Assignments with effect from 22nd July, 2021

Insolvency Professionals will not be in a position to accept more than ten CIRP assignments as the Insolvency and Bankruptcy Board of India (Board) has added a clarification under clause 22 of the Code of Conduct for Insolvency Professionals attached as Schedule I to the IBBI (Insolvency Professionals) Regulations, 2016. This amendment has been notified on 22nd July, 2021 with immediate effect. The clarification also seeks to restrict the large assignments to three within the overall assignment limit of ten at any point of time. Large assignments mean where admitted claims exceed Rs. 1000 crores. The clarification reads as under:

Clarification: An insolvency professional may, at any point of time, not have more than ten assignments as resolution professional in corporate insolvency resolution process, of which not more than three shall have admitted claims exceeding one thousand crore rupees each.

Let us understand the impact of this newly added clarification:

  1. The amendment is effective from 22nd July, 2021. It is not clear whether this would apply to existing assignments in hand or the limit in number of assignments is to be applied for future assignments. For example, if the Insolvency Professional is already handling 12 assignments, would he be required to reduce it to 10 assignments? Logically, that does not seem to be the intent. The application of the clarification should be prospective and it should not affect the existing number of assignments. In other words, if an insolvency professional is already handling CIRP assignments exceeding the limit, he should be able to continue to handle them but he will not be in a position to accept any more CIRP assignment unless the number of CIRP assignments is reduced below the limit. The sub-limit applicable for large assignments would also apply in a similar way. However, a clarification from the Board is desirable.
  2. The clarification uses the expression “assignments as resolution professional” causing confusion as to whether this would include assignments as interim resolution professional. Also what happens if the insolvency professional continues to perform his duties as a resolution professional in his capacity as interim resolution professional where resolution professional is not appointed by the committee of creditors. Looking at the intent of the clarification and conjunct reading with the definition of resolution professional [S. 5(27)], which includes interim resolution professional, it can be concluded that assignments being handled as interim resolution professional would also be covered within the overall limit of ten assignments and sub-limit of three large assignments.
  3. The restriction applies only to CIRP assignments. This means assignments being handled by an insolvency professional as a liquidator or resolution professional under pre-packaged insolvency resolution process under Part II or resolution professional or bankruptcy trustee under Part III will not be counted for the purposes of limit of 10 assignments and sub-limit of 3 large assignments. The use of the words “ten assignments as resolution professional in corporate insolvency resolution process” is quite clear and leaves no room for ambiguity. The use of the expression “ten assignments as resolution professional in corporate insolvency resolution process” seems to be intentional. It, however, defies logic and reasoning as burden of handling liquidation cases is as cumbersome as that of CIRP assignments. The idea behind restricting assignments is to ensure effective handling considering clause 22 which provides that an insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments.The expression “assignment” used in clause 22 is not restricted to CIRP assignments alone. It includes, in its ambit, all assignments accepted by an insolvency professional. Be that as it may, the language employed in clarification is clear and unambiguous to restrict CIRP assignments only. 
  4. Large CIRP assignments have been restricted to maximum of three within overall limit of ten assignments. Large assignments mean the assignments where admitted claims exceed Rs. 1000 crores. There seems to be some practical difficulty in implementing this. The amount of admitted claim is fluid and dynamic in CIRP assignments. At a given point of time, the admitted claims may be less than Rs. 1000 crores but may swell beyond this limit after a while. For example, an insolvency professional has accepted 10 assignments out of which 3 assignments are having admitted claims of more than Rs 1000 crores. This seems to be in compliance of clarification. What would happen if in two more cases, the value of admitted claims exceed Rs 1000 crores at a given point of time? Would the insolvency professional be considered in non-compliance of the Code of Conduct? Is he expected to shun two such large assignments? Whether he would be permitted by Adjudicating Authority to resign and leave the assignments mid-way? There is no clarity on these aspects at this point of time. However, it is suggested that insolvency professional must take appropriate steps to remain within the limits set in the clarification.

Conclusion : Welcome Step but Board needs to Clarify the Clarification!

This amendment was expected and this would ensure fair and equitable distribution of assignments besides ensuring that assignments are handled effectively by the insolvency professionals. However, some aspects, as noted above, require clarifications and the Board is expected to issue clarification clarifying the clarification!

Disclaimer: The views expressed here are for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, Ashish Makhija, Author and/or Tranzission does not take any responsibility for any liability or non-compliance.


@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on personal interpretation of the author for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

NCLAT settles the crucial Issue: Speedy Liquidation Versus Endless Resolution

In a significant ruling in Kridhan Infrastructure Private Limited vs. Venkatesan Sankaranaryan & Another[1], NCLAT has held that timely liquidation is to be preferred over endless resolution. It has also held that unless the liquidation order is shown to contain material irregularity or fraud, liquidation order cannot be set aside using inherent powersin the light of specific provisions under section 61(4) of the Code. It has also categorically ruled that stakeholders’ consultation committee is different from committee of creditors and the decision of stakeholders’ consultation committee is not binding on the liquidator.

Briefly, in this case, upon failure of implementation of the resolution plan by the Resolution Applicant, NCLT directed liquidation of the corporate debtor as proposed by the committee of creditors. The Resolution Applicant aggrieved with this order filed an appeal before NCLAT alleging that it was not provided with an opportunity of being heard and that the order of NCLT ordering liquidation be set aside preferring ‘Resolution’ over ‘Liquidation’. Resolution Applicant undertook to implement the plan.

Here is the lowdown of the issues decided by NCLAT:

Speed is the Essence

NCLAT noted that prime reason behind enactment of IBC is time bound process. It specifically noted that “if an Adjudicating Authority extends the Insolvency Resolution Process beyond the timeline mentioned u/s 12(3) of the code, the same will be in negation of the underlying policy behind the court of ensuring timely resolution of Company Insolvency”.  NCLAT held that a “Timely Liquidation is preferred over endless Resolution process.”. Making it clear that time period mentioned in section 12 is mandatory and cannot be extended. It held that “If time specified by statute is changed, then it will give room for wider complications/implications, in the considered opinion of this Tribunal.”

Specifically noting that Resolution Applicant failed to adhere to the timelines for equity infusion as per the approved plan, NCLAT held that “the speed specified in the Code cannot be diluted as there is likelihood of adversely affecting the interests of both sides. If the same is delayed, maximization of value of assets of the ‘Corporate Debtor’ will weaken the realisation of potential creditors.”

Use of Inherent Power to set aside order of liquidation

On use of inherent powers under Rule 11 to set aside the order of liquidation as prayed by the Resolution Applicant, NCLAT noted that “it is well settled principle in Law that an ‘inherent power’ cannot be resorted to when there are specific provisions in Law to deal with the situations relying on the judgment of Apex Court in ‘Durgesh Sharma’ V. ‘Jayshree’ reported in Air 2009 Supreme Court at page 285. NCLAT refused to invoke jurisdiction under Rule 11 for setting aside order of liquidation.

Eligibility under Section 29A due to later development

NCLAT noted the strong objection of the Liquidator on the ground of huge default by the Resolution Applicant through its subsidiaries outside India. NCLAT held that provisions of Sections 29A(f) and (j) get attracted.

Stakeholders Consultation Committee recommendations are not binding on Liquidator

NCLAT upheld the argument on behalf of the Liquidator that “in so far as the ‘stakeholders’ consultation committee under the Liquidation process, unlike ‘Committee of Creditors’ under ‘Resolution process’ they do not have any power to determine and even their consultation is not binding on the liquidator.”

Conclusion

The judgment is unique as it deviates the beaten path of ‘maximization of value’ which is oft quoted to persuade NCLAT and NCLAT benches. The phrase has become a monologue to justify any attempt to resolve insolvency ignoring the crucial part of preamble which speaks of ‘time bound manner’.  This judgment notes the importance of timelines under the Code and sets an example that no matter what, timely liquidation is preferable over repeated attempts to resolution. This judgment is a trend setter in the era of IBC 2.0 and the NCLT benches are now armed to counter the over used phrase maximization of value.


[1] Company Appeal (AT) (Insolvency) No. 202 of 2020

NCLT Has No Power To Quash Civil Suit or Direct Police To Arrest Any Person Obstructing Liquidator Under IBC : NCLAT

In an unprecedented order, Mumbai Bench of NCLT had passed an order quashing a Civil Suit against the corporate debtor pending with Civil Court, Junior Division, Wada District Palghar, Maharashtra filed by a person claiming user of property auctioned by the liquidator during liquidation process. NCLT also directed Police to arrest the said person for threatening and obstructing Liquidator. 

On appeal[1], the Appellate Tribunal has set aside the order of the NCLT holding that the direction passed by the Adjudicating Authority quashing Civil Suit is not legal. The NCLT had relied upon section 33(5) of the Insolvency and Bankruptcy Code, 2016 to pass such an order and the Appellate Tribunal rightly noted that “even if such bar is there in section 33(5) read with sectiosn 63 and 231, it is not appropriate for the Adjudicating Authority to quash the concerned suit which is filed in the Civil Court. It would be for the Liquidator to move the concerned Civil Court pointing out the provision of IBC or to move the District Court in the hierarchy for quashing of the Suit concerned.”

The Appellate Tribunal also modified the order of arrest by the Police with the direction that “the Police concerned should take suitable action as per law.”

Conclusion

At the first instance, the Adjudicating Authority should not have passed such an unusual order quashing civil suit as it has no power to do so under IBC. Its jurisdiction does not extend to orders passed by civil courts. On the contrary, It should have directed the liquidator to approach the civil court by bringing to its attention relevant provisions of the Code barring jurisdiction of civil courts during liquidation or corporate insolvency resolution process. Based on the outcome, higher courts could have been approached by the liquidator including filing of a writ petition before the High Court. Seemingly, even the liquidator was ill advised.

NCLT should have also refrained from directing arrest of the Appellant as it cannot do so under the Code. Appellate Tribunal remedied the situation by modifying the order of NCLT and directing the Police to take action as may be warranted under law. The over enthusiastic approach adopted by NCLT does not reflect the judicial wisdom expected of NCLT benches, which is critical to success of the Code. Though subtle in nature, the course correction by Appellate Tribunal was desirable.

@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on personal interpretation of the author for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.


[1] E.C. John vs.  Jitender Kumar Jain & Ors., Company Appeal (AT) (Ins) No.249 of 2020, dated 1st September, 2020  

Who Wins – Equitable Consideration or Commercial Wisdom of CoC?

Abstract

This piece deals with the jurisprudence whether the Adjudicating Authority or the Appellate Authority has the authority to reject a resolution plan approved with requisite majority by the Committee of Creditors (CoC) which is lower than liquidation value in quantitative terms.


Resolution Plan should typically mirror the Insolvency and Bankruptcy Code, 2016 (Code) objectives in maximizing the value. The Code, the way it is derafted, puts all its faith in the Committee of Creditors (CoC) in protecting the commercial interest of stakeholders of the corporate debtor while they determine the feasibility and viability of the rival plans placed before them. Maximization of value probably weighs prominently on the minds of collective wisdom of the CoC while they carry the burden of expectations from other stakeholders. It is a tough job. It is about making a difficult choice keeping everyone’s faith intact while ensuring that maximum recoveries are made for their dues as well while the corporate debtor gets a chance to be rehabilitated.

The job of CoC is hard enough to select the suitable resolution plan amongst the available ones. The hardest part surfaces when a resolution plan lower than the liquidation value is received. No one would want to be in that position for taking a call either to approve or reject such a plan as it affects everyone and allegations are likely to fly thick and fast, if such a plan is approved.

Resolution Plan lower than Liquidation Value

One question that begs answers is whether the CoC can consider and approve a plan which is lower than the liquidation value? On the face of it, such an approval looks incongruous as it would seem as defeating the interest of stakeholders while upsetting the objectives of the Code. Practicalities apart, does the provisions of Code in any way bar the CoC to approve such a plan? The Apex Court had the occasion to examine this aspect in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors[1] particularly whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not. In this case, NCLAT has directed that amount in resolution plan should match the liquidation value and this was challenged before Supreme Court. 

The Supreme Court noted that that “the object behind prescribing such valuation process is to assist the CoC to take decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof.” The Court further opined that the Appellate Authority has proceeded on equitable perception rather than commercial wisdom. The Court felt that “the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.” While recognizing the primacy of commercial wisdom of the CoC, the Apex Court rejected the idea of matching the value of the resolution plan to the liquidation value.

In another judgment[2] rendered on 28th February, 2020, the Apex Court has relied upon the Maharashtra Seamless judgment and set aside the judgment of NCLAT whereby the matter was remitted to NCLT after finding that Section 30(2) of the Insolvency and Bankruptcy Code together with the principle of maximization of assets of the corporate debtor, a resolution plan which is lesser than liquidation value cannot be accepted. The Supreme Court held that since this issue has been decided in Maharashtra Seamless judgment, the Appellate Tribunal cannot reject resolution plans approved by the CoC, which are lower than liquidation value. 

Conclusion

There is no provision in the Code that justifies a view that resolution plans should carry a value higher than liquidation value. A closer look of the provisions tells us that the Resolution Applicant is not aware of the liquidation value as determined by the Registered Valuers though they may have their own assessment of value. In fact, CoC members also do not know the liquidation value unless the resolution plans are placed before them. Liquidation value, at the most, works as a guidance for the CoC; it cannot be considered as a benchmark and resolution plans offering lower value than liquidation value ought not to be rejected on this ground alone. Of course, the resolution plan must pass the test of feasibility, viability and must be implementable besides satisfying the legal provisions. New lessons are being learnt everyday.


[1] Civil Appeal No. 4242 of 2019 decided on 22nd January, 2020.

[2] State Bank of India vs. Accord Life Spec Private Limited, Civil Appeal No. 9036 of 2019.

Retaining Books of Account Post Dissolution of a Corporate Debtor

Uncertainty remains as to how long the Liquidator should maintain the books of account of the corporate debtor under the Insolvency and Bankruptcy Code, 2016. Do they become bona vacantia? For clarity, it may be noted the Liquidation Regulations specify that the liquidator shall preserve specified registers and books of account for a period of eight years from the date of dissolution of the corporate debtor. These can be referred to as ‘books of the liquidator pertaining to liquidation’. The format of the registers and books of account has also been specified in the regulations. The regulations also mandate that the liquidator should complete the books of account of the corporate debtor if they are incomplete on the liquidation commencement date. The reference to books of account here is to ‘books of the corporate debtor prior to liquidator. In this sense, there are ‘books of the corporate debtor’ and books of the liquidator’.

The period of preservation of books of the liquidatorhas been provided in the regulations. But the Code and the regulations are silent on the period for which the books of the corporate debtorare to be preservedby the liquidator. Can they be destroyed upon order of dissolution?

The requirement of maintenance and preservation of books of account of a company is provided in the Companies Act, 2013 in following terms:

Books of Account are to be maintained for period of not less than eight financial years immediately preceding a financial year together with the vouchers relevant to any entry in such books of account. Where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit (s. 128).

The company shall maintain and preserve at its registered office copies of all documents and information as originally filed for incorporation till its dissolution (s.7).

Interestingly, the Companies Act, 2013 deals with the disposal of books of account upon dissolution as under (s. 347):

  • The books and papers of a company to be dissolvedand those of the Company Liquidator to be disposed of in the manner as directed by the Tribunal.
  • After the expiry of five years from the dissolution of the company, no responsibility shall devolve on the company, the Company Liquidator, or any person to whom the custody of the books and papers has been entrusted, by reason of any book or paper not being forthcoming to any person claiming to be interested therein.
  • The Central Government may, by rules, prevent for such period the destruction of the books and papers of a company which has been wound up and of its Company Liquidator.

Under the Company (Court) Rules, 1959 [Applicable to winding-up governed by provisions of the Companies Act, 1956], the High Court, in its discretion, can pass orders directing disposal of the books and papers of the company and of the Liquidator.

Section 356 of the CA 2013 provides that the dissolution can be declared as void by the Tribunal upon an application being made within two years from the date of dissolution.

Similar provisions find no place in the Code or in the Regulations. The period for preservation for books of liquidator is provided in the Regulations but not for books of the corporate debtor. Section 347 of the Companies Act, 2013 cannot be applied for liquidation under the Code regardless of the fact that the same Tribunal has the authority to deal with winding-up under the Companies Act, 2013 as well as liquidation under the Code. In any case, corporate debtor under the Code is a broader term and also includes limited liability partnership and there is no question of extending the applicability of provisions of the Companies Act, 2013 to a LLP. Winding-up process under the Companies Act, 2013 and liquidation process under the Code are two distinct processes under two different statutes.

Typically, the regulations should be amended to provide for the period of preservation of books of the corporate debtor. Until, this is done, the onus lies on the Tribunal using its power under section 60(5) of the Code to direct the period and the manner of preservation or disposal of the books of account of the corporate debtor upon the order of dissolution.

There may be case of pending investigation and litigation against the corporate debtor. Should the books and records be maintained till the end of investigation or litigation? The answer lies in the question itself. No corporate debtor should, ordinarily, be dissolved if any investigation, litigation or case is pending against it. Dissolving such a corporate debtor would be a huge lapse giving rise to a legal crisis.

@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

 

Challenges in Insolvency Resolution Cases Involving Property Buyers

Property Buyers under Insolvency and Bankruptcy Code (IBC) rejoiced when they were expressly considered as financial creditors following the prevailing confusion. Hohfield’s jural matrix  correlates power with duty. Property buyers [I prefer using this term than ‘homebuyers’ because of newly inserted Explanation to section 5(8)] were empowered to have a say in the committee of creditors (CoC). Having attained the position of power, they, however,  must not forget their duty to ensure that corporate insolvency resolution process goes on smoothly. On the contrary, few cases that are in progress shows that they are acting as bullies  like a mob swayed by varied opinions without weighing the options that are in their interest. The side-stepped promoters are enjoying the split  between home owners associations of different projects and even sometimes energizing the rift, and happily watching the hassled insolvency professionals. 

The task of insolvency professionals in real-estate cases under IBC is more of a public relation exercise, in which they are unfortunately not trained, with property owners eating away the precious time at hand  by engaging them through constant phone calls, emails, personal visits with all sorts of threats – veiled and open. The insolvency professionals who were used to their cosy offices are suddenly feeling the heat and pressure of a different kind. The complaints against insolvency professional are flowing thick and fast and the Regulators and Adjudicators are having a hard time.

Not only that, even property buyers are being harassed at the hands of IRP/RP and Authorised Representatives. The process has become cumbersome and unfortunately the Regulator has left it to be sorted out on its own without any deep thinking and research on the subject. Writing english by way of Regulations is easy but when it comes to implementation, the avoidable issues that crop up could have been easily taken care of. We see formation of numerous committees on these subjects with some members using their association on social media platforms for enhancing their own image and reputation. The resultant work is not showing results; rather it has compounded the confusion. Serious change in planning and strategy is called for. Regulator cannot get away by saying that ‘everyone is learning by the day’ at public forums.  Regulating is a serious business.

Let us look at some of the challenges being faced by interim resolution professionals or resolution professionals (IRP/RP) while dealing with property buyers and vice versa and here’s my opinion on resolving some of them:

Challenge # 1 : Replacing IRP

Replacing IRP is a time consuming process in cases involving property buyers. IRP constitutes CoC and convenes its first meeting with usual agenda items of  remuneration and expense approval, and an item for his appointment as RP. Perceptively unhappy with the IRP’s functioning so far, the trend in few cases reveals that property buyers have voted out the appointment of IRP as RP. The democratic vote process is the winner but here begins the difficult part. Who will now be in the saddle as RP? Assuming there are 5 projects in different state of progress, there is a deep split amongst the property buyers. Each project has an association leading its way. Consensus to one name is the most arduous process. Once that is done, begins the task of requesting the RP to convene a meeting. As per regulations, financial creditors holding a minimum of 33% voting share must make a request for convening the meeting of CoC for considering agenda for appointment of another RP. Here begins the ‘free for all’.

First Challenge

In many cases, RP has refused to entertain e-mails from property buyers directly advising them to bring it through the Authorized Representative. This is patently wrong as Authorized Representative is not a ‘be-all’ for property buyers as financial creditors; he is merely a link for taking their ‘will’ on agenda items to CoC meetings by representing them. This does not mean that property owners cannot communicate directly with IRP/RP or entertain their request for calling a CoC meeting. IRP/RP should soften their stand as it is not legally tenable. Law permits property buyers to file claims directly to IRP and sort out problems in verification stage. Hence, communicating directly with IRP/RP is not prohibited.

Second Challenge

This begins at the door of Authorized Representative. The property buyers are informed that any requisition has to come via an e-mail. No physical request with signatures of property buyers will be entertained. Property buyers have to pull all their socks and arrange e-mails from one and all to muster 33%. Once that is done, Authorized Representative claims having not received e-mails. Precious days are wasted in locating e-mails in spam, junk and trash folders. Authorised Representatives need to understand that they are there to serve the interest of property buyers and should make it easy for them by not insisting on communicating only through e-mails. The propogators of ‘ease of doing business’ would do well to look into this aspect or else India’s rank for ‘insolvency matters’ is likely to go down.

Third  Challenge

Once 33% voting share is mustered, Authorised Representative throws a spanner by not showing any urgency in forwarding the request to IRP. If by chance, he receives some emails (not aggregating to 33%) from some property buyers suggesting another name, other than the one recommended by 33% voting share, he insists on sending this agenda item to IRP/RP to be included in CoC requisitioned by 33%. This effectively means there will now be a contest between two insolvency professionals for  being appointed as RP. The Authorised Representatives easily forgets that initially he insisted for 33% voting share for any agenda to be sent to IRP.

Fourth Challenge 

The IRP who receives the forwarded request for CoC meeting springs a surprise by insisting that the resolution forwarded for appointment of an IP as RP must contain the remuneration part also. Another round of discussion takes place over few days ignoring the basic intent behind IBC for making the process as ‘time-bound’. Zero knowledge is understandable but half knowledge is a dangerous phenomenon. It is the prerogative of the financial creditors to propose any agenda item in a requisitioned CoC meeting. IBC does not require that resolution for appointment of RP should contain the remuneration also. It can be decided later on as RP may also not be aware of the volume of work involved at this stage. It is a matter of decision by CoC at any stage not necessarily along with the resolution for appointment of RP. Despite being convinced, IRP takes his own time sulking by the fact that his name was rejected by same group of creditors. Calling a meeting in companies in real estate is a painful process with lack of trained IPs and their misconstrued interpretations. IPs should take legal advise from experts on these issues and proceed on the basis of a legal opinion because everything cannot be written in a law or regulations or rules. The focus should be on being logical, reasonable and fair.

(This is part I of continued series of challenges facing resolution of corporate in real estate sector) 

@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

NCLT Knocks Out 137 Days from CIRP

NCLT Principal Bench in a recent order of NIIL Infrastructure Private Limited  directed exclusion of 137 days from CIRP period. The Bench was of the opinion that section 12(2) for extension of time as alternative prayer need not be invoked in the case. In this case, Resolution Professional (RP) was appointed by the Bench after a gap of 114 days after the tenure of Interim Resolution Professional (IRP) ended. Though the IRP organised few meetings of the committee of creditors (CoC) but no decision could be arrived at on the appointment of RP. It was only after the intervention of the Bench that CoC resolved to appoint RP. Earlier also 23 days were lost when inadvertently different IRP was appointed than the one proposed by the financial creditor. The Bench, thus, excluded 137 days from the CIRP period relying upon Quinn Logistics India Pvt Ltd judgement of the NCLAT. This order paves way for exclusion of time as an alternative to extension of time where there is delay in appointment of RP.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Fundamental Change in Insolvency Commencement Date – Ambivalent Thinking

The Insolvency and Bankruptcy Second Amendment Bill, 2018 provides for a fundamental change in the insolvency commencement date (ICD) of Corporate Insolvency Resolution Process (CIRP). Presently ICD commences on the date when the order is passed by NCLT admitting the application for CIRP under section 7, 9 or 10. ICD is a significant date in the Code and many things turn on it such as the countdown for period of CIRP begins from ICD and the moratorium takes effect from ICD amongst others. In some cases, while passing the order of admission, the Bench does not simultaneously appoint an Interim Resolution Professional. This was a source of confusion as the appointment of the IRP at a later date than admission used to allow the IRP or RP lesser time than envisaged under the Code. The Second Amendment Bill, in order to correct this situation, has proposed to commence the ICD from the date of appointment of the IRP by NCLT by adding a proviso in section 5(12).

The proposed amendment looks reasonable on paper and is probably  based on experience out of the cases under the Code so far. The Code, we all know, owes its genesis to the Vishwanathan Committee Report (Bankruptcy Law Reforms Committee Report). The Report has an incomparable sense of clarity of thought and as per the Report, the ICD plays an important role in the CIRP. 

The Report recommended commencement of moratorium from Insolvency Commencement Date. The date of passing of order of admission by the Adjudicating Authority was considered as a significant date and the moratorium also commenced from this date. Moratorium has a rational relation to CIRP in the sense that this marks the beginning of calm period. Calm period provides for no coercive action against the assets of the corporate debtor and also bars transfer or alienation of property of the corporate debtor. 

With the proposal to shift the Insolvency Commencement Date to the date of appointment of IRP by NCLT, there may be gap of few days in the date of order admitting the application and date of appointment of IRP. For this gap, no moratorium will be in effect and this may prove to be counter productive. Section 14(2) provides that supply of essential goods or services to the corporate debtor shall not be terminated or suspended or interrupted during moratorium period. During the gap between the order admitting the application for CIRP and date of appointment of IRP, this provision will not have any effect and the essential services may get disrupted which may affect the functionality and working of the corporate debtors as the news of CIRP spreads like wild fire. This does not behold good for the stakeholders of the corporate debtor. Penal sections such as section 71 will effectively lose their sting.

The solution lies in amending several provisions of the existing Code to retain the effect of the provisions of the Code. This is the beginning of more changes.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

THIRD AMENDMENT IN CIRP REGULATIONS – A CASE OF OVERSTEPPING BY IBBI

[Updated after passage of Insolvency and Bankruptcy (Second Amendment) Act, 2018]

Since its introduction, the Insolvency and Bankruptcy Code, 2016 (Code) has ruffled feathers amongst the Indian corporate sector. Original Code has been amended few times and every amendment has been a classic case of discussion amongst the insolvency practitioners, who are front runners for their implementation. The recent amendment of corporate insolvency resolution process regulations by the Insolvency and Bankruptcy Board of India (IBBI) is no different. IBBI has exceeded its authority under the Code besides stoking confusion. The genesis of the Third Amendment in corporate insolvency resolution process regulations lies in the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) which was promulgated by the President of India on 6 June 2018. The Amendment Ordinance, in turn, owes its existence to the Report of the Insolvency Law Committee submitted in March 2018.The need to amend the CIRP Regulations arose because of the Amendment Ordinance 2018.

Gap between Date of Ordinance and Amended Regulations

The gap between the date of commencement of the Ordinance and the date of amended Regulations was avoidable. The purpose of issuing Ordinance is to legislate urgent matters while the Parliament is not in session. Without the amended regulations, some of the amendments brought in by the Ordinance remained on paper and this has defeated the very purpose of promulgating the Ordinance. It was incumbent upon the Regulator to be prepared and issue the Regulations soon after the Ordinance for faster and effective implementation of the amendments.

Applicability of Third Amendment CIRP Regulations

The applicability clause of the Third Amendment has become a cause of concern. On plain reading, it sounds good, but a deeper analysis shows that clause 1(2) has been drafted without much thought. Clause (1) reads as under:

“1(1) These regulations may be called the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018.

 (2) They shall come into force on the date of their publicationin the Official Gazette and shall apply to corporate insolvencyresolution processes commencing on or after the said date.”

The enforcement date states that the amended regulations come into force from the date of their publication (i.e.3 July 2018) but applicabilityis restricted to corporate insolvency resolution processes commencing on or after 3 July 2018. This has come from nowhere, effectively nullifying the immediate applicability of the provisions amended by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018). It may be recalled that Amendment Ordinance 2018 came into force from 6 June 2018 and it is applicable for all corporate insolvency resolution processes regardless of their commencement date. In other words, any pending action under pending corporate insolvency resolution process or corporate insolvency resolution process commencing on or after 6 June 2018 requires compliance of amended provisions. It does not make a distinction between pending corporate insolvency resolution process or the corporate insolvency resolution process which commences on or after the date of enforcement of the Ordinance.

With no such express or implied intent in Ordinance, the Third Amendment in CIRP Regulations still distinguishes between the corporate insolvency resolution processes on the basis of their commencement date. The amended Regulations apply to corporate insolvency resolution processes commencing on or after 3rdJuly 2018. For example, Regulation 6 provides for public announcement. It has been amended to provide that the public announcement must state additional matters as per newly inserted clauses (ba) and (bb). Applying the applicability clause of the regulation, it applies to corporate insolvency resolution process that commence on or after 3 July 2018. In a case where application for initiation of corporate insolvency resolution process was admitted on 2 July 2018 and the public announcement was yet to be made, the additional matters are not required to be stated in the public announcement. In that sense, two sets of regulations will exist simultaneously and the Interim Resolution Professionals, resolution professionals, corporate debtors, committee of creditors, resolution applicants and adjudicating authority will have to keep in mind the two sets of regulations. It is a sure shot recipe for confusion and chaos.

The following tabular presentation assesses the difficulty that may arise in implementing some of the provisions of the Code which have become applicable from 6 June 2018:

Regulation  Number Subject Matter Analysis
3(1A) Consent to be obtained from Interim Resolution Professional or Resolution professional replacing Interim Resolution Professional in Form AA In pending corporate insolvency resolution process cases, this need not be followed as per applicability clause whereas the Code mandates that w.e.f 6 June 2018, written consent of Interim Resolution Professional and resolution professional replacing Interim Resolution Professional must be obtained.
4A Choice of Authorised Representative The Ordinance amended the Code treating property buyers as financial creditors w.e.f 6.6.2018. Hence, a right vests in such financial creditors to be a part of committee of creditors through authorized representative from that date. However, such a right has been negated in cases of corporate insolvency resolution processes pending as on 3.7.2018 since regulations relating to class of creditors are applicable for corporate insolvency resolution process commencing on or after 3 July 2018.
12(2) Late Submission of claims Prior to amendment, the claims could be filed with the Interim Resolution Professional or resolution professional before the approval of resolution plan. This has been changed to restrict late filing of claim up to ninety days from the insolvency commencement date.

Distinguishing between pending corporate insolvency resolution processes and fresh corporate insolvency resolution process on or after 3 July 2018 seems discretionary and there is no rational relation to the objective sought to be achieved.

30A Withdrawal of Application The Code has inserted a section for withdrawal of applications. Restricting it to cases of corporate insolvency resolution process commencing on or after 3 July 2018 defies reasoning. The Code does not state that this provision is applicable to future corporate insolvency resolution processes.

 

Regulation 30A relating to withdrawal of admitted application under section 12A is non-est

The insertion of Regulation 30A prescribing the manner of withdrawal of applications under section 12A cannot be a case of simple oversight. Section 12A of the Code reads as under:

“12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be prescribed.”

The presence of the words ‘as may be prescribed’ in section 12A means that a corresponding Rule will be prescribed by the Central Government. This intent runs throughout the Code. This view is fortified if we consider clause (fa) inserted in Section 239(2), which reads as under:

The Second Amendment Act, 2018 has amended the language of section 12A and it reads as under:

“12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.”

“239. Power to make rules. –

(1) The Central Government may, by notification, make rules for carrying out the provisions of this Code.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for any of the following matters, namely: –

 xxxx

 (fa) the manner of withdrawal of application under section 12A;

 xxxx”

Clause (fa) has been inserted by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) as a consequence of insertion of section 12A. Conjunct reading of section 12A and 239(2)(fa) underlines the fact that rules have to be made for the subject matter provided in section 12A and such rules can only be made by the Central Government. IBBI enjoys no power under section 12A or section 240 of the Code to make Regulations in respect of withdrawal of applications as provided under section 12A. The exercise of power by IBBI by inserting Regulation 30A exceeds authority. The Regulation 30 is a nullity in the eyes of law.

Clause (fa) proposed to be inserted by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) as a consequence of insertion of section 12A stands omitted in the Second Amendment Act, 2018.

The exercise of ‘super authority’ by IBBI has created an avoidable confusion and chaos. Interestingly, the provisions of making the application under section 7,9 and 10 for initiating corporate insolvency resolution process are provided in the Rules framed by the Central Government but the manner of withdrawal of such an application is provided in the Regulations. This mistaken assumption of power by IBBI in prescribing the manner of withdrawal of application needs to be addressed immediately.

By amending the language of section 12A with replacement of as may be prescribed with as may be specified, the regulations issued by IBBI have become valid but it has created another dichotomy –  making of application under section 7, 9, 10 is governed by the Rules whereas withdrawal of application is governed by Regulations. This anomaly, if challenged, may lead to setting aside of Regulations.

Resolution Professional to make Application for Withdrawal

Regulation 30A(1) provides that Interim Resolution Professional shall make an application for withdrawal of application under section 12A in Form FA, after obtaining the consent of the committee of creditors by ninety percent voting share. The application is required to be made before issue of invitation of expression of interest under Regulation 6A. Section 12A does not restrict the time for making an application for withdrawal of application. However, the Regulation 30A prescribes the outer limit within which the application for withdrawal is to be made. This seems to be contrary to the scheme of the Code.

Further, the use of the word ‘applicant’ in section 12A refers to the applicant creditor and not the resolution professional. Sub-regulation (3) of Regulation 30A provides that the application for withdrawal is to be made by the resolution professional to the committee of creditors. Significantly, the Code provides that the application is to be made to the Tribunal.

Bank Guarantee to accompany the application

Regulation 30A(2) also provides that application for withdrawal shall be accompanied by a bank guarantee towards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 till the date of application. This provision is an additional requirement not envisaged under the Code. It is also not clear as to who will provide the bank guarantee – resolution professional or applicant creditor or corporate debtor or promoters/directors of the corporate debtor.

Committee of creditors to consider application within seven days

Regulation 30A(3) provides that the committee of creditors shall consider the application made by the resolution professional within seven days of its constitution or seven days of receipt of the application, whichever is later. The committee of creditors, in turn, has to approve the decision of withdrawal with ninety percent vote for withdrawal to be effective. There is no provision in the Code for making application to committee of creditors in section 12A.

Application to be forwarded to the Tribunal

Regulation 30A(4) also provides that ince the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval. The use of the word ‘on behalf of the applicant’ is surprising. The resolution professional, while making the application has to submit an affidavit verifying the application. Here, resolution professional becomes an applicant on behalf of the applicant. Such an intent is also missing in the Code.

Conclusion

IBBI has exceeded its authority while framing the Regulations. In terms of section 240, the Regulations framed by IBBI cannot be inconsistent with the provisions of the Code and the Rules framed thereunder. The Amended Regulations is a typical example of inconsistency between the Code and Regulations. IBBI has clearly overstepped its authority and the power delegated to it under the Code. IBBI owes its existence to the Code and it not expected to transgress the threshold set for it.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

To Empanel or Not To Empanel – Confusion Confounds!

The Insolvency professionals are in a dilemma. The banks and financial institutions are creating a panel of their own to select insolvency professionals to be appointed as Interim Resolution Professional and Resolution Professionals. The lenders are doing this based on their own criteria and parameters. The persons selected to be on their panel are the registered insolvency professionals.

Mussadi Lal’s case set the tone when the Principal Bench headed by the President of NCLT rejected the decision of the committee of creditors to appoint a Resolution Professional in place of the Interim Resolution Professional because the insolvency professional was on the panel of one of the financial creditors. The Bench held that such a insolvency professional cannot be regarded as independent umpire to conduct corporate insolvency resolution process. The mere fact of empanelment of the insolvency professional became the cause of rejection.

The New Delhi Bench, in a recent order in Uttam Strips Limited, has, however, held that shortlisting of the names of eligible Resolution Professionals (sic) and maintenance of the list by Banks does not per se give rise to the fact that Resolution Professional would lean in favour of the financial creditor. The Bench held that his work is open to scrutiny and subject to final decision of the CoC.

The Bench took judicial note of the fact that banks normally propose the appointment of a Resolution Professional of their own choice and a person different from the one who had initially acted as the IRP. The Bank had shortlisted names of empaneled and eligible Resolution Professionals  for recommending the names in various corporate insolvency resolution processes. The Bench also noted that the person recommended had not rendered any professional services to the Bank in the past in any professional capacity. The Bank had shortlisted the names of 125 professionals for their appointment as Resolution Professional. This was done so that no time is lost in assessing their eligibility or seeking their consent. The fact that the bank had previously scrutinised the credentials of a professional is no ground to impute partiality.  The Bench held that there is nothing wrong in any bank maintaining their list of resolution professionals whom they feel are competent or experienced to handle the resolution process.

Understanding Counter View

This order by New Delhi Bench is in stark contrast to the earlier order of the Principal Bench. The interest of empanelled IPs may conflict if they have rendered any services to the Bank or financial creditor empanelling them. There may be a counter argument that the IP appointed as IRP or RP may have to tow the line of the Bank or else may not stand any chance of being recommended again for appointment in another case. The neutrality gets affected to this extent. But this argument may not hold good as the IP is bound by the ethical norms under the Code and Regulations. Independence is a state of mind and IP is independent if he acts independently.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.