Report of the Insolvency Law Committee-Recommendations on the implementation of the Insolvency and Bankruptcy Code 2016
REPORT OF THE INSOLVENCY LAW COMMITTEE
The provisions relating to corporate insolvency in the Code came into effect on 1 December, 2016 and has completed a little more than one year in its operation. As per the Economic Survey 2017-18, 525 applications have been admitted for corporate insolvency resolution within the framework envisaged in the Code.
The Ministry of Corporate Affairs (the “MCA”) had constituted the Insolvency Law Committee (the “Committee”) vide office order dated 16 November 2017.
The Committee was constituted with the mandate of making recommendations on
(a) issues arising from the functioning and implementation of the Code,
(b) issues that may impact the efficiency of the corporate insolvency resolution and liquidation framework prescribed under the Code, and
(c) any other relevant matters as it deems necessary
The Report deals with the recommendations of the Committee and the rationale for such recommendations, in relation to the Code and the relevant subordinate legislation viz. Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“CIRP Rules”), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).
This Report by the Insolvency Law Committee is a sincere attempt to encourage sustainable growth of the credit market in India, while safeguarding interests of various stakeholders. The key recommendations in this Report are as follows:
(i) in recognition of the importance of Micro, Small and Medium Enterprises (MSMEs) to the Indian economy and the unique challenges faced by them, it has been recommended to allow the Central Government to exempt MSMEs from application of certain provisions of the Code. Illustratively, since usually only promoters of an MSME are likely to be interested in acquiring it, applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs;
(ii) in order to address the problem of unintended exclusions under section 29A that disqualifies certain persons from submitting resolution plans under the Code, it has been recommended to streamline it so that only those who contributed to defaults of the company or are otherwise undesirable are rendered ineligible. Moreover, being mindful of the Non-Performing Assets (NPA) crisis in the country, the need to encourage the market for NPAs was felt and accordingly several carve-outs from section 29A have been recommended for pure play financial entities. In order to prevent retrospective application of any proposed change, it has been recommended to add a proviso that the amendments shall be applicable to resolution applicants that have not submitted resolution plans as on date of coming into force of the said amendment;
(iii) it has been recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Hon’ble Supreme Court in ongoing cases. Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code;
(iv) to clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-à-vis the moratorium on the assets of the corporate debtor, it has been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code;
(v) in order to fulfil the stated objective of the Code i.e. to promote resolution, it has been recommended to re-calibrate voting threshold for various decisions of the committee of creditors;
(vi) in order to enable the corporate debtor to continue as a going concern while undergoing Corporate Insolvency Resolution Process (CIRP) it has been recommended to empower the NCLT on the application of IRP/RP to allow expansion of the scope of essential goods and services beyond what is specified in CIRP Regulations;
(vii) in order to cater to exceptional circumstances warranting withdrawal of an application for CIRP post-admission, it has been recommended to allow such exit provided the CoC approves such action by ninety per cent of voting share;
(viii) in order to prevent misuse of section 10 of the Code, which permits initiation of CIRP by Corporate Applicant, it has been recommended to provide for the requirement of special resolution passed by the shareholders of the Corporate debtor or resolution passed by at least three-fourth of the total number of partners of the corporate debtor as the case may be;
(ix) in order to facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow one year time to obtain necessary statutory clearances from Central, State and other authorities or such time as specified in the relevant law, whichever is later.
The Committee deliberated on Cross Border Insolvency and noted that the existing two provisions in the Code (S. 234 & S. 235) do not provide a comprehensive framework for cross border insolvency matters. Accordingly, it was decided to attempt a comprehensive framework for this purpose based on UNCITRAL model law on Cross Border Insolvency, which could be made a part of the Code by inserting a separate chapter for this purpose. Given the complexity of the subject matter and the requirement of in-depth research to adapt the model law in the Indian context, the Committee decided to submit its recommendations on Cross Border Insolvency separately.
