Good News! Apex Court Holds Retired Bankers and Receiving Pension Eligible to be Appointed As Resolution Professional in CIRP

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

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.

4 Critical Questions Relating to Avoidance Transactions in Voluntary Liquidation


The law relating to voluntary liquidation has been moved from the Companies Act, 2013 (or erstwhile Companies Act, 1956) to Insolvency and Bankruptcy Code, 2016 (Code or IBC). Voluntary liquidation is the option available to solvent corporate persons having committed no default. The voluntary liquidation, interalia, requires a special resolution of the members of the company and approval of such resolution by the creditors representing two-thirds in value of the debt of the company within seven days of special resolution.

Liquidation Commencement Date 

The Adjudicating Authority is not involved at this stage of voluntary liquidation and with no order of liquidation necessary, the date of passing of special resolution by the members of the company is considered as the liquidation commencement date[1]. The Adjudicating Authority comes into picture after the affairs of the company have been completely wound up when the liquidator is under an obligation to make an application to the Adjudicating Authority for dissolution of the company[2]. The voluntary liquidator may, however, approach the Adjudicating Authority during the liquidation process in case of non-cooperation of personnel of the company or for determination of any question of law or fact.

Applicability of Section 35 to 53 of Liquidation Process

For conducting the voluntary liquidation, no separate process has been provided in the Code. The Code provides for adoption of liquidation process from sections 35 to 53 with such modifications as may be necessary[3]. Equally the provision of cooperation of personnel of the company provided in CIRP process apply to voluntary liquidation process[4]. The liquidation process chapter contains sections from 33 to 53. Section 33 provides for initiation of liquidation of a corporate debtor which has undergone the process of Corporate Insolvency Resolution Process (CIRP). Section 34 provides for appointment of the liquidator and fee to be paid. Logically these two sections have no applicability to the voluntary liquidation process as no order of Adjudicating Authority is required and the fee of voluntary liquidator gets decided by the members appointing the liquidator. But rest of them apply with necessary modifications.

4 Critical Questions Remaining Unanswered relating to Avoidance Transactions

So far so good but applicability of sections 43 to 51 dealing with avoidance transactions leaves following 4 questions unanswered: –

  1. Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  
  2. If yes, what will be the starting point of look back period?
  3. Is it possible to dissolve the company while avoidance applications are pending for adjudication?
  4. What will be the treatment of any recoveries made out of avoidance transactions?

First Question: Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  

Plain reading of section 59(6) with conjunctive reading of avoidance transactions sections from sections 43 to 51 suggests that it is incumbent upon the liquidator appointed for voluntary liquidation to form an opinion and make a determination to identify the transactions under sections 43, 45, 49 and 50 of the Code. The use of the word liquidator in avoidance transaction sections includes the liquidator appointed for voluntary liquidation and hence the liquidator is under a duty to determine the avoidance transactions and file appropriate applications before the Adjudicating Authority. A crucial question relates to payment of fee of forensic auditor, if appointed by the liquidator. Who pays it? Can the liquidator claim it as part of liquidation cost? The answer to this pertinent question depends on negotiated fee of the voluntary liquidator. No separate fee can be charged if the liquidator has not factored it in the negotiated fee. In other words, if negotiated fee provides for separate payment to be made for this effort, then it may be charged, else the voluntary liquidator will have to bear expenses of this effort out of his/her fee.

Second Question: If yes, what will be the starting point of look back period?

This question has no straight answer and it calls for application of interpretation rules. All the relevant sections dealing with avoidance transactions, namely, sections 43, 45, 49 and 50 provide the starting point of look back period as insolvency commencement date. In voluntary liquidation, there is no insolvency commencement date as it is not a consequential step arising out of CIRP process. The voluntary liquidation, as we are aware, is meant for solvent companies with no default and hence there is no question of CIRP process. The look back period for avoidance transactions is as under:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
45Undervalued Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to insolvency commencement date2 years prior to insolvency commencement date

In all cases of avoidance transactions, the look back period is to be determined with reference to insolvency commencement date. In CIRP process and possible consequential liquidation of the corporate debtor, there is an insolvency commencement date and it can be the reference point.  But for the purposes of voluntary liquidation, insolvency commencement date is irrelevant as it is not a process arising out of or as a result of CIRP process.

Literal application and construction of these avoidance transaction provisions in the context of voluntary liquidation is leading to absurdity. The literal construction has, thus, to be eschewed and the phrase insolvency commencement date has to be construed in accordance with the context. The text and context must match. Here being a mismatch, the interpretation is necessary. We need to apply golden rule of interpretation. When literal interpretation leads to an irrational result that is unlikely to be the legislature’s intention, a departure can be made from literal meaning. A preferred meaning can be chosen. 

In voluntary liquidation, there is non-existence of insolvency commencement date. There exists only the liquidation commencement date. Hence, insolvency commencement date should be read as liquidation commencement date for the purposes of construing look back period and for determination of avoidance transactions in voluntary liquidation process. This interpretation gets strength from Section 59(6) which makes provisions of sections 35 to 53 of liquidation process applicable to voluntary liquidation with such modifications as may be necessary. Replacement of insolvency commencement date with liquidation commencement date for the purpose of construing look back period for avoidance transactions partakes the character of ‘necessary modification’ being reasonable, judicious and rational . Even the purposive approach of interpretation can be applied. The purpose of determining avoidance transactions is to provide equitable treatment to the creditors as provided in section 53 of the Code. The transactions carried out by the erstwhile management are put under the lens. From the insolvency commencement date, it the insolvency professional who takes control of the management and affairs of the company. Prior to the insolvency commencement date, the company remains under the control of erstwhile management and it is imperative to identify avoidance transactions. Hence the cut-off date for look back period is the insolvency commencement date. In voluntary liquidation, the liquidator assumes control over the company and its assets from the liquidation commencement date. Prior to this date, it is the management of the company which remains in charge of the affairs of the company and the possibility of avoidance transactions cannot be ruled out.  To conclude, in voluntary liquidation, the cut off date for look period would be liquidation commencement date instead of insolvency commencement date.

Base upon the interpretation, the look back period for avoidance transactions under voluntary liquidation should be considered as follows:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
45Undervalued Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to liquidation commencement date2 years prior to liquidation commencement date

Third Question – Is it possible to dissolve the company while avoidance application/s is/are pending for adjudication?

In the context of liquidation process, this question is easy to answer. Regulation 44(1) of the Liquidation Regulations reads as under: 

“The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the Adjudicating Authority or any action thereof.”

Conjunct reading of Regulation 44(1) of the Liquidation Regulations with Form H, where details of pending avoidance application are to be stated, it can be concluded that regardless of pendency of the applications for avoidance transactions, the company can be dissolved by the Adjudicating Authority after completing all other activities under liquidation.

One is persuaded to apply the same rational to voluntary liquidation and arrive at the same conclusion. Before it is done, let us consider Regulation 38(b)(iii) of Voluntary Liquidation Regulations, which reads as under: 

“38 (1) On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of – 

xxxxx

(iii) No litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation.”

xxxxx  

This Regulation has caused confusion as in the final report, the liquidator has to make an affirmative statement that no litigation is pending. If avoidance application is pending for adjudication, the liquidator cannot make this kind of affirmative statement as pending avoidance application is in the nature of a pending litigation. The Bankruptcy Law Reforms Committee Report, which happens to be the genesis of the Code, dealt with distribution of realization made on account of avoidance transactions. It is useful to reproduce relevant portion of Para 5.5.7:

“The Committee recommends that all transactions up to a certain period of time prior to the application of the IRP (referred to as the “look-back period”) should be scrutinized for any evidence of such transactions by the relevant Insolvency Professional. The relevant period will be specified in regulations. At any time within the resolution period (or during the Liquidation period if the entity is liquidated) the relevant Insolvency Professional is responsible for verifying that reported transactions are valid and central to the running of the business. There should be stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the “look back period” should be specified in regulations to be longer.

The Code will give the Liquidator the power to file cases for recovery. Some jurisdictions set such recoveries aside for payment to the secured creditors. Given the extent of equity financing in India, all recoveries from such transactions will become the property of the trust, and will be distributed as described within the waterfall of liabilities.”

The BLRC recommended formation of trust for recoveries made through vulnerable transactions (termed as avoidance transactions in the Code). The BLRC preferred providing discretion power to the Adjudicating Authority to close liquidation case inspite of the fact that application for recovery from the vulnerable transactions is pending. Relevant extract of Para 5.5.10 from BLRC Report is reproduced hereunder: 

“The Liquidator may apply to the Adjudicator to close down the case with estimates of the time to recovery and possible value of recovery from the vulnerable transactions. If the Adjudicator rules in favour of the application, an order to close the Liquidation case will be issued. This will trigger a set of accompanying orders as follows:

1. An order to the relevant registration authority to remove the name of the entity from its register.

2. An order releasing the Liquidator from the case.

3. An order to submit all records related to the case to the Regulator.

If the Adjudicator does not rule in favour of the application, the Liquidation case remains open. The Code permits the Liquidator to apply for the closure again after a reasonable period of time has passed.”

Coupled with the recommendation of the BLRC and the provisions contained in Liquidation Regulations, it can be safely concluded that the principle applicable for liquidation can be applied in voluntary liquidation cases. There is no justification as to why a different treatment should be afforded in case of voluntary liquidation. In so far as Regulation 38(1)(ii) is concerned, the liquidator can mention in Final Report that no litigation is pending except application for avoidance transactions. It is left to the discretion of Adjudicating Authority to decide whether to close the liquidation or to keep it open till the final decision in these applications is made.

Fourth Question: What will be the treatment of any recoveries made out of avoidance transactions?

This aspect has not been dealt in by the Code or the Regulations framed thereunder. However, relying upon the suggestions of the BLRC (relevant extract reproduced hereinabove), it is judicious to distribute the recoveries made in accordance with the distribution waterfall under section 53 of the Code.

Epilogue

The conclusion to each question has been stated hereinabove adopting interpretative approach. It is fair to expect a suitable amendment in the Code and Regulations framed thereunder to set at rest any doubt and interpretative difficulties that are likely to arise amongst the benches of the Tribunal and Appellate forums while dealing with these pertinent questions. 


[1] Section 59(5) read with section 5(17) of the Insolvency and Bankruptcy Code, 2016 

[2] Section 59(7) of the Insolvency and Bankruptcy Code, 2016 

[3] Section 59(6) of the Insolvency and Bankruptcy Code, 2016 

[4] Section 19(3) of the Insolvency and Bankruptcy Code, 2016 

Understanding 2019 IBC Amendments

Insolvency and Bankruptcy Code of India has been the subject of interpretation at various judicial forums from Adjudicating Authority to Appellate Tribunal to Apex Court of India. Last amendment in 2018 brought in home buyers as financial creditors but many questions remained unanswered as most of the homebuyers did not participate in the voting process. New issues relating to distribution to operational creditors in a resolution plan cropped up with the judgment of Appellate Tribunal in Essar Steel in July 2019, which is now under a stay by the Apex Court.  

The IBC Amendment Bill 2019, introduced in Rajya Sabha on 24 July, 2019 was passed by Rajya Sabha on 29thJuly and by Lok Sabha on 1stAugust, 2019. It is awaiting President’s assent and the Central Government’s notification.

Here is the analysis of the 2019 amendments in IBC:

Ascertaining existence of default in 14 days by NCLT

A provision exists in the Code which mandates the Adjudicating Authority (NCLT for Corporate Insolvency) to ascertain the existence of default within 14 days of the receipt of the application from a financial creditor for initiating corporate insolvency resolution process. The use of the word `shall’ in the mandate cannot be overemphasized. However, this wasn’t being put to practice. The reasons could be either too much workload at hand (the application filed is not listed so soon before NCLT after filing) and the Courts reading principle of natural justice in this provision by issuing notice of the application filed to the corporate debtors. Naturally, the process of filing reply and rejoinders took longer than required 14 days. 

The amendment now requires the NCLT to record reasons if the ascertainment of existence of default is not done within 14 days of filing of application. Under the existing provision, it is incumbent upon the NCLT to dispose of the application within 14 days of the receipt of application and not only ascertain the existence of default. It is important to refer to section 64 of the Code which provides for expeditious disposal of the applications by NCLT. It also provides that NCLT should record reasons if the application is not disposed of within the prescribed time frame and that an extension should be sought from the President of NCLT by the Adjudicating Authority giving reasons of delay and the President is empowered to extend it for maximum of 10 days on the basis of reasons recorded. Looking through this prism, the existing provision intended to achieve the same objective that is now sought to be achieved. From a practical perspective, section 64 was rendered nugatory by the judgment of Appellate Tribunal in J.K.Jute Mills Company Limited vs Surendra Trading Company, 1stMay, 2017, wherein by a stroke of pen, the Appellate Tribunal held that the period of 14 days within which NCLT is mandated to admit or eject the application is directory and not mandatory. Unfortunately, this part of judgment wasn’t touched by the Apex Court in an appeal before it.

Being already covered by this judgment of Appellate Tribunal, the proposed amendment is a non-starter from the word go. If not, judiciary will find a way through this. It is flummoxing why a similar amendment has not been brought in section 9 and 10 which also mandate the NCLT to pass an order within 14 days of receipt of application.

Fixing the outer time-limit for completion of Corporate Insolvency Resolution Process

The Code boldly announced that corporate insolvency resolution process shall be completed within 180 days with an extension of maximum of 90 days; in all 270 days. The experience says as on 30thJune, 2019, 445 insolvency processes are going on beyond 270 days out of the total pendency of 1292; a whopping 34%. Time period of 270 days does not look to be practical due to cases going back and forth to Appellate Tribunal and to Supreme Court. 

The amendment now provides that whatever may be the reason of delay including the period consumed in litigation or stay, the overall time period for a corporate insolvency resolution process cannot exceed 330 days under any circumstance. The use of the phrase “shall mandatorily be completed”reflects the urgency and dictate of the Parliament. While granting outer limit of 330 days, the provision has been couched in a language which covers extension and exclusion of period for any reason curtailing the power of the Adjudicating Authority granted to it under the judgment of Appellate Tribunal in Quinn Logistics India P. Ltd. v. Mack Soft Tech Pvt. Ltd.whereby the Adjudicating Authority could exclude certain period from the 270 days for good grounds and unforeseen circumstances. 

There have been spurt in exclusion applications after this judgment and in few cases, the Adjudicating Authority has allowed exclusion of 270 days on the ground of non-cooperation by the personnel of the corporate debtor! The amendment wishes to rein this in but again judiciary may have the last laugh. The big question that arises is whether Quinn Logisticssurvives after this amendment? The amendment nullifies the judicial decision for now, but it remains to be seen – how long. 

In cases where 300 days have already gone by, the amendment provides that they must be completed within 90 days from the date of commencement of the Amendment.

Allottees’ (Homebuyers) Majority Decision Makes Their Voting Share Absolute

The allottees were considered as a ‘class of creditors’ and attained the status of financial creditors by an amendment in 2018 to be represented by an Authorised Representative in a Committee of Creditors (CoC), who used to vote in the CoC on their behalf as per the voting pattern by each allottee. Their voting share were counted on the basis of the debt due to each of them. Experientially, all the allottees never voted and they always fell short of their aggregate voting share. For example, in a CoC, if the voting share of 560 allottees was 66% and assuming only allottees holding 56% voting share voted, the decision was left at the mercy of other financial creditors in the CoC. The amendment takes care of this anomaly and it provides that once the allottees in a class of creditors take a decision by more than 51% vote (correct phrase would have been fifty one percent or more), the Authorised Representative shall cast the vote as if 100% of them have approved it. Here, more than fifty one percent is calculated on the basis of the votes cast and not total votes. Let us understand by way of an illustration:

ParticularsNumber/Percentage
Voting Share of aggregate of allottees in CoC66%
Voting Percentage of votes cast in favour of an item by allottees56% 
Voting Percentage of votes cast against the item by allottees10%
Voting Percentage of abstention of allottees34%
Overall Voting Share of allottees for the purposes of voting in CoC (prior to amendment)36.96 (56% of 66%)
Overall Voting Share of allottees for the purposes of voting in CoC (after amendment)66%

This is beneficial for the allottees as law now assumes that 100% of the allottees have decided in one way or the other if decision is represented by more than 51% of the votes cast. This makes their voting share in CoC absolute even though the actual voting share may be lesser. Authorised Representative shall, henceforth, vote as a group of ‘class of creditors’ and not as per wish of each allottee.

Anticipated Problem Due to Erroneous Drafting in 2019 Amendment

The problem, however, does not end here. The erroneous drafting is bound to make things complex. Assuming, the votes cast to arrive at a decision do not attain the benchmark of ‘more than fifty one percent’ (Votes cast in favour – 50.80% and against – 49.20%). It is not clear how the Authorised Representative will vote in such a situation. Instead of the phrase, ‘more than fifty one percent’, the use of ‘by majority’would have been appropriate and practical.

Protecting Interest of Operational Creditors and Dissenting Financial Creditors in a Resolution Plan

In order to further protect the interest of the operational creditors, amendment has been made in section 30. Now it is mandatory for a resolution plan to provide for minimum payment to operational creditors, which should be higher of amount that would have been paid to operational creditors under liquidation in accordance with section 53 or amount that would have been paid to operational creditors if the amount under the resolution plan would have been distributed as per order of priority stated in section 53 of the Code. Prior to amendment, it was restricted to the amount that would have been paid to the operational creditors under liquidation.

The change now enhances their chances of being considered for payment on a higher footing. Under liquidation, the amount would have restricted to ‘liquidation value’ but now the order of priority for operational creditors would be considered higher of ‘liquidation value’ and ‘amount under resolution plan’. 

 The dissenting financial creditors are also allowed to be paid the amount not less than the amount payable in accordance with order of priority in section 53 of the Code. The manner of such payment has been left to be specified by the Board. Consequent amendment has been made in regulation making power of the Board in section 240.

Interestingly, this provision will operate retrospectively for all cases where the approval of Adjudicating Authority to a resolution plan is pending, or appeal is pending or time for filing appeal has not lapsed, or where any other legal proceeding is pending against the decision of the Adjudicating Authority in respect of a resolution plan. Retrospective application of these provisions would make the process slow, complicated and may result in unintended consequences. Let us take a case where the application for approval of resolution plan is pending under section 30/31, the resolution plan, which is not in accordance with the amended provisions, will have to be re-drawn and re-approved by the committee of creditors. If the corporate insolvency resolution period is already over (original period allowed plus extension of 90 days plus exclusion), embargo of 330 days in section 12 will apply and it would make it legally impossible to grant more time eventually leading to liquidation of such a corporate debtor.   

 To overcome recent Essar Steel judgment of the Appellate Tribunal which paved way for parity of payment to operational creditors, the amendment now provides that the manner of distribution proposed must take into account the order of priority amongst creditors as laid down in Section 53 and the value of security interest of a secured creditor. The mandatory consideration of ‘value of the security interest of a secured creditor’ seems ambiguous and unnecessary. Section 53 disregards the value of security interest of a secured creditor, which means if the secured creditor relinquishes the security interest, the amount available is distributed proportionately amongst secured creditors regardless of the value of the security interest and ranking of their charge. This amendment is prospective and will not apply retrospectively to plans approved but pending for approval of adjudicating authority or pending in appeal or other legal proceeding. 

Resolution Plan Binding on Government and Government Authorities

An amendment has been made in section 31 providing that the resolution plan once approved shall also be binding of Central Government, State Government, local authority in respect of statutory dues owed to them. This amendment is clarificatory in nature as there was not any doubt in this regard but in some cases, the statutory authorities such as Income Tax etc interpreted it otherwise. By specifically including them here, the amendment paves the way for resolution plan being binding on Government and government authorities.

Decision to Liquidate Can Be Taken at Any Stage

The unamended provision gave ample powers to the committee of creditors to take the decision to liquidate at any stage of corporate insolvency resolution process. But some benches of NCLT ruled otherwise and in few cases passed strictures against committee of creditors if they decided to liquidate at early stages of corporate insolvency resolution process. Fortifying the intent of the Code that commercial decision to resolve or liquidate fall within the exclusive domain of the committee of creditors, the amendment now seeks to clarify that the committee of creditors is free to take decision to liquidate at any stage even before the preparation of information memorandum. This amendment would reduce the financial burden on the members of the committee of creditors as they will not be required to shell out CIRP costs and costs relating to keeping the corporate debtor as a going concern when they foresee no viability in the business of the corporate debtor. The amendment strengthens the decision-making power of the committee of creditors. However, this may not take away the power of Adjudicating Authority or Appellant Tribunal or the Supreme Court to examine whether such a decision has been taken fraudulently.

#IBBI – Changing Rules of the Game Midway

April 1 is traditionally a day of practical jokes or hoaxes or harmless pranks. Looks like, for IBBI, April 1 is a day of teaching some hard lessons to aspiring insolvency professionals, and insolvency professionals who have formed insolvency professional entities.

The Insolvency and Bankruptcy Board of India (IBBI or Board) has announced amendments in Insolvency Professionals Regulations changing the rules of the game from 1st April, 2018. The major changes relate to qualification and experience necessary for registration as an Insolvency Professional (IP), undergoing continuing professional education and requirement of minimum net worth and other conditions for an Insolvency Professional entity.

Qualifications and Experience

Prior to the amendments announced on 27th March, 2018, the registration as IP was subject to fulfilment of any of the three conditions, namely, passing of National Insolvency Examination, or passing of Limited Insolvency Examination and having 10 years of experience as a CA or CS or CMA or Advocate, or passing of Limited Insolvency Examination and having 15 years of experience in management with Bachelor’s degree.

The change brings about 3 basic conditions to be fulfilled before grant of registration as IP –

  1. Passing of Limited Insolvency Examination (LIE) within 12 months before the date of application for enrolment with IPA;
  2. Completion of pre-registration educational course from IPA after enrolment;
  3. Fulfilling any one of the following criteria:
  • successful completion of the National Insolvency Programme; or
  • successful completion of the Graduate Insolvency Programme; or
  • fifteen years’ of experience in management with Bachelor’s degree from a university established or recognised by law; or
  • ten years’ of experience as chartered accountant registered as a member of the Institute of Chartered Accountants of India, or company secretary registered as a member of the Institute of Company Secretaries of India or cost accountant registered as a member of the Institute of Cost Accountants of India, or advocate enrolled with the Bar Council.

Let’s analyse the changes:

  • The passing of LIE is now mandatory for everyone aspiring to be an IP. Earlier, passing of LIE was defacto mandatory as  National Insolvency Examination (NIE) was not notified.
  • The registration for IP is to be applied within 12 months of passing of LIE. The celebrated myth of life time validity of LIE stands shattered. If 12 months expire, LIE is to be passed again. Probably, the Board wants that aspiring IPs should remain current. But this was something which was not unthinkable at the time of original framing of Regulations.
  • Pre-registration educational course from IPA after enrolment has been made mandatory. The details of such a course are still not in public domain. Add to this the likely delays in the registration process since pre-registration course is yet to be designed.
  • Successful completion of National Insolvency Programme, or Graduate Insolvency Programme, or fifteen years’ of experience in management with Bachelor’s degree from a university established or recognised by law; or ten years’ of experience as chartered accountant registered as a member of the Institute of Chartered Accountants of India, or company secretary registered as a member of the Institute of Company Secretaries of India or cost accountant registered as a member of the Institute of Cost Accountants of India, or advocate enrolled with the Bar Council is a must.

No details are available for National Insolvency Programme, or Graduate Insolvency Programme – its duration, course curriculum, who will conduct etc. At the minimum, the Board should have been ready with details of these programs prior to introducing them through change in the Regulations.

Amendments Affect Aspirants who have passed LIE but deferred decision to Register

The change in Regulations, though prospective, affect the candidates who have passed LIE prior to 1.4.2018 but have not been granted registration. It is not clear what will be the fate of applicants whose applications are pending with Board. After 1.4.2018, in the absence of any exception in the Regulations, the Board has no power to grant registration to pending applicants unless they undergo pre-registration educational course from IPA .

Those who have not applied for registration despite having passed LIE will suffer in a similar way. This tantamount to discriminating between those who have registered and those who deferred their registration decision despite passing the LIE during the same time.

Grey area exists as to the status of those who have cleared LIE but whose applications are pending with IPAs for enrolment or with IBBI for registration or are in transit between IPAs and IBBI as on 1st April, 2018.

Some enthusiastic aspirant may challenge these amendments through a writ, and there  lies a huge chance for these amendments to be set aside for such persons. At best, the Board should have made them applicable prospectively clarifying that amended regulations will be applicable to those passing LIE on or after 1.4.2018.  This can still be done.

Continuous Professional Education

The Board has introduced a concept of undergoing continuing professional education, as may be required by the Board. The purpose of Regulations is to bring about clarity. Instead, through the amendments, the Board has retained power to notify requirement of continuing professional education. Perhaps, some guidelines can be expected for the number of hours and type of education. Introduction of continuing professional education is, however, a progressive step.

Change in Requirements of IPE

The change in IPE requirements are likely to hit hard the existing IPEs.

  • The IPEs cannot have any other business objective except provide support services to insolvency professionals, who are its partners or directors. Effectively this means that IPEs cannot render service to any other person except its own insolvency professionals.
  • The minimum net worth requirement of Rs. one crore is a regressive step as it is opposite to its objective of capacity building. Why the Board wants only moneyed IPEs to function? Why it was not thought of while notifying the Regulations originally? The criteria of minimum net worth has no relation to existence of IPE. These are service oriented entities and having a minimum paid-up capital has no rational relation to the objective sought to be achieved. The focus should be on intellect and knowledge rather than on paid-up capital. It is permitted to form a company without any requirement of paid-up capital but not IPE.
  • The requirement of majority of its shares or capital contribution to be held by insolvency professionals, who are its directors or partners also fails to satisfy the test of rationality.
  • The restriction that none of the partner or director of an IPE should be a partner or a director of another IPE is also beyond any comprehension.
  • As of 28th March, 2018, 76 IPEs[1] have been recognised by the Board. All such IPEs have been given time till 30th June, 2018 and 30th September, 2018 for fulfilling the criteria. Many are likely to exist IPE business, if that what IBBI wants.

The smaller IPEs with one or two partners or directors will be hit hard by these sudden changes by the Board. The amendments encourage concentration of work in few hands rather than individual insolvency professionals who have been lured by the glitter of opportunity offered by this newest profession. Instead of encouraging the professionals to come forward and join the bandwagon, the stricter Regulatory requirements have done exactly the opposite.

Dear IBBI, shifting goal post midway is never a good idea.

© 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.

[1] Source: http://ibbi.gov.in/insolvency-professional-entities.html