[Piyush Kr. Choubey and Kaustubh Kumar are 4th year students at the National University of Study and Research in Law, Ranchi]
The Ministry of Corporate Affairs (“MCA”) in January 2023 floated a discussion paper on possible changes to the Insolvency and Bankruptcy Code, 2016 (the “Code”). One of the topics in the discussion paper was “Reimagining the consideration of the resolution plan and the manner of distribution of the proceeds from the same during the CIRP”, wherein, it proposed that more than one resolution plan could be accepted for the same corporate debtor (“CD”). However, at least one of the plans should provide for insolvency resolution of the CD as a going concern. Through this change the MCA seeks to maximise the value of the assets of the CD and avoid liquidation.
In light of the aforementioned scenario, this post explores the said proposal considering the current provisions of the Code, which only permit one resolution plan for the CD, and the intent of legislature when it consolidated the laws regarding insolvency, bankruptcy and restructuring into one single code. It further discusses the potential benefits and challenges of this proposal for the creditors and stakeholders of the CD. Lastly, it concludes by providing some remedial measures that could be undertaken for the smooth implementation of the said proposal.
Amendment to the CIRP Regulations
The Insolvency and Bankruptcy Board of India (“IBBI”) brought an amendment to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (“CIRP Regulations”) on 16 September 2022. The CIRP Regulations were amended to include regulation 36B(6A) as well as regulation 37(m), wherein the resolution professional may seek the committee of creditor’s (“CoC”) approval to invite resolution plans for the sale of one or all of the CD’s assets, if no resolution plan is submitted in response to her request.
The MCA discussion paper on amending the Code is but a confirmation to this mechanism of multiple resolution plans for sale of CD’s assets. However, the same also clarifies that there must be at least one resolution plan for insolvency resolution of the CD as a going concern in order to invoke this mechanism. Now, before analysing the intricacies of this mechanism we need to understand the legislative intent behind it.
Legislative Intent of Value Maximisation
The Code was introduced for a smooth resolution of the assets of the CD as a going concern as well as maximising the value of CD’s assets. The same has been reiterated in plethora of its judgements by the Supreme Court. The current provisions of the Code are more than enough to fulfil these aforementioned objectives; however, there are situations where the assets of the CD are in different locations and consist of both functional and non-functional assets. In this situation, the prospective resolution applicant (“PRA”) might only be interested in the functional assets at some location as it would be too expensive for the PRA to revive the assets of the CD as whole. Another situation that could arise is when no resolution plan is received by the RP; herein, the assets of the CD go into liquidation. In both these scenarios, the primary objective of the Code, i.e., maximising the value of assets breaks down. Hence, the idea of multiple resolution plan or sale of one or more assets of a CD was conceptualised with the sole intent to maximise the value of CD’s assets.
The Challenges Ahead and the Way Forward
Although this appears simple to incorporate, there exist various challenges which should be addressed properly before implementing the proposed mechanism. Otherwise, they may hinder its implementation.
Approval of the Committee of Creditors
The Code requires the resolution plans to be approved by the CoC which is comprised of all the financial creditors (“FC”) of the CD whose claims have been verified by the interim resolution professional (“IRP”). Further, section 30(4) of the Code provides that CoC can approve a resolution plan by voting 66% of the voting shares of the FC in favour of it. However, in a scenario where the resolution plan is for an individual asset of the CD, wherein only one FC has the valid claim, the problem would arise as to whose voting share will be considered since the sole stakeholder of that particular asset will be the FC who have a claim in that asset. The same is nowhere clarified in both the amendment to the CIRP Regulations as well as the MCA discussion paper.
Therefore, the authors believe that the first and foremost step should be to clarify the position of voting shares while voting for an individual resolution plan. The optimal solution to this would be to allow only the stakeholder of a particular asset to vote on the resolution plan considering they would be the most interested in such assets of CD.
Fate of Other Assets vis-à-vis CIRP Regulations
The amendment to CIRP Regulations provides that individual assets of the CD may be resolved in one resolution plan. However, the fate of other assets is left to be decided in any manner. Regulation 37(m) of the amended CIRP Regulations provides:
“A resolution plan is required to provide for measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to, the sale of one or more assets of corporate debtor to one or more successful resolution applicants submitting resolution plans for such assets and manner of dealing with remaining assets.” [emphasis added]
Herein, the term “manner” was vague in the sense that the resolution plan of any individual asset would not prescribe any manner of dealing with other assets. This was clarified by the MCA discussion paper that at least one of the plans must provide for insolvency resolution of the CD as a going concern.
Partial Liquidation as the First Resort
It is reasonable to presume that after the proposed amendment, there could be a situation where PRAs submit resolution plans for only certain assets from which they are likely to gain profits. This will lead other remaining assets to liquidation. The liberty likely to be given to the PRAs through the said amendment to submit resolution plan for certain assets shall undermine the objectives of the Code. It is pertinent to note that the objective of the Code since its inception was to provide for ‘resolution’; not liquidation. The very foundational objective of the Code nowhere uses the word ‘liquidation’. Moreover, if this regime brought into effect without pondering over this point, it would be catastrophic to the expectations of the CD as the National Company Law Tribunal already has limited powers with respect to the approval of resolution plans and most of the resolution plans will be passed merely in the name of ‘commercial wisdom’ of the CoC. The authors’ views are that this ought to be clarified by the Ministry or Parliament beforehand rather than being tested before the courts so as to save time and cost.
The MCA discussion paper along with the amended CIRP Regulations provide for approval of resolution plan for individual or more assets of the CD. The legislative intent behind this proposal is value maximisation and avoiding the CD’s assets undergo liquidation, which seems the best way to deal with value depreciation and liquidation. However, there are certain challenges which needs to be addressed before its implementation. Although a key obstacle concerning the fate of other assets was clarified by virtue of the MCA discussion paper, there is still one major problem to be addressed and that is the clarification regarding voting share required for approving a resolution plan related to a particular asset.
Overall, this proposal is certainly a major step towards achieving the objective of value maximisation of the CD’s assets. However, it can only truly fulfil its intended purpose once it overcomes the aforementioned challenges.
– Piyush Kr. Choubey & Kaustubh Kumar