[Yarabham Akshit Reddy and Chakkapalli Satya Kaushik are 3rd year BA.LLB (Hons) students at Hidayatullah National Law University, Raipur]
On 4 February 2025, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper proposing 11 significant changes to the regulations under the Insolvency and Bankruptcy Code (IBC). These amendments aim at resolving various operational challenges faced during the corporate insolvency resolution process (CIRP), liquidation process and insolvency process of personal guarantors. These changes seek to streamline resolution processes, enhance the outcomes for both creditors and debtors alike and create a more equitable and robust insolvency framework. Ultimately, it can enhance transparency and effectiveness of processes while also minimizing delays and costs.
This post will delve into the intricacies of the consultation paper. First, it will discuss the key changes proposed in the paper and its implications on the resolution processes. Second, it will critically analyse the paper and highlight its shortcomings and gaps. Finally, this post will conclude by suggesting a way forward to address these challenges.
Changes Proposed in the Discussion Paper
The changes that are outlined in the discussion paper aim to ensure transparency, effectiveness and timely execution of the resolution process.
Firstly, the paper proposes for a coordinated insolvency resolution for interconnected entities. This approach will provide for a mechanism to address situations where entities with intertwined operations undergo insolvency resolution. Commonly, a corporate group is a consortium of companies which are often linked to each other operationally and financially. When one of the companies enters into insolvency, it may affect the operations of the whole group. Hence, when one or more of such companies defaults on its debts, the committee of creditors (CoC) and all the stakeholders can seek a coordinated resolution to capitalize on these synergies. This will ensure maximisation of asset value and reduce procedural and cost inefficiencies. The lack of a dedicated legal framework for group insolvencies under the IBC makes this proposal more desirable. The mechanism will provide provisions for joint hearings, appointment of a common resolution professional, data sharing and coordinated timelines to carry out CIRP for multiple entities simultaneously.
Secondly, it advocates for explicit provision to prohibit reliefs and concessions following the approval of a resolution plan. Generally, most resolution applicants ask for concessions or modifications even after a resolution plan has been approved by the adjudicating authority under section 31 of IBC. This raises significant questions on the timely implementation of resolution plans affecting the integrity of CIRPs. The current provisions do not explicitly prohibit modifications following the approval, thereby resulting in a substantial number of lawsuits seeking for the same. This change is in line with the Supreme Court judgement in Ebix Singapore Private Limited v. Committee of Creditors Educomp Solutions Limited, wherein it established that no modifications can be entertained once a resolution plan has been approved by the adjudicating authority.
Thirdly, it proposes to amend regulation 36B(6A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to invite resolution plans for both corporate debtors as well as specific assets or businesses of the corporate debtor simultaneously. Currently, the resolution professional can request for sale of assets only after failing to receive a resolution plan for sale of entire corporate debtor, which may result in extended timelines for CIRPs and value erosion for viable businesses. This provision will be beneficial as specific viable assets may fetch higher valuations rather than a slump sale of the business as a whole. This flexibility will allow the resolution professional to consider multiple options and decide which outcome will yield the maximum value to the CoC. These asset-specific plans will result in faster implementation instead of losing their value during the process.
Lastly, it proposes to delete the provision of a sale of the corporate debtor as a going concern under regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016. A sale of the corporate debtor refers to the transfer of assets and liabilities of the corporate debtor to a transferee without dissolving the company. First, the CIRP will be initiated during the insolvency of the corporate debtor. It is only after failing to revive the debtor that the IBC provides for liquidation. IBBI’s discussion paper argues that selling the corporate debtor as going concern again under liquidation process defeats the purpose of the IBC as the debtor went into liquidation only after neither creditor nor debtor were able to find an agreeable solution to revive the corporate debtor. Dissolutions yield higher realizations and reduce escalating operational costs compared to going concern sales during the liquidation process. This approach intends to simplify the process by prioritizing asset monetization and recovery of creditors instead of reviving the business.
While these changes are a welcome step, they introduce certain shortcomings and operational challenges that require regulatory oversight and clearer guidelines to achieve their objectives. These hurdles and roadblocks necessitate attention and will be further discussed in the next part.
Piercing the Veil: Analysing the Risks, Pitfalls and Safeguards
Although the paper proposes to tackle operational challenges faced during the CIRP, liquidation process and insolvency resolution, it fails to address several shortcomings occurring in efficient implementation of resolution process.
Firstly, the paper proposes for a coordinated resolution but it fails to accommodate for consolidation of assets and liabilities of interconnected entities, which is the essence of group insolvencies. This can result in a common CIRP which can maximize the asset value of group company and reduce cost and time inefficiencies. This is known as doctrine of “substantial consolidation”, which is a common practice under United States and Australian bankruptcy laws. The IBBI has also published a report on group insolvency in 2019, which recommended a comprehensive framework for group insolvencies.
In the absence of such a mechanism, adjudication authorities have been playing proactive role in the application of substantive consolidation principle. In Giriraj Enterprises v Regen Powertech, the National Company Law Appellate Tribunal (NCLAT) has emphasized on the application of the principle to further the objectives of IBC. Further, the National Company Law Tribunal (NCLT) in SBI v Videocon evolved a two-pronged test to allow consolidations in exceptional cases. The first prong requires the prime facie existence of factors which prove intermingling of operations that their segregation is not feasible, while the second requires determining viable profit proposals after their segregation. This could strike a balance between consolidations and maintaining corporate individuality.
Next, completely disallowing reliefs, concessions and modifications following the approval of a resolution plan could jeopardise the rights of resolution applicant in certain circumstances like force majeure, active concealment of material facts, and change in market forces, which may yield a suboptimal outcome for creditors and stakeholders. Since the Supreme Court in Ebix held that no modifications or withdrawals could be made after the approval of a resolution plan, the resolution applicant has to suffer the consequences. Until clarity is provided on this issue, applicants and creditors should cautiously draft and negotiate the resolution plans to account for any potential hurdles that may arise in the future before their submission to the adjudicating authority.
Further, allowing part wise resolutions is an applaudable step given that most of the bidders will not be interested in acquiring the corporate debtor in its entirety. Even if bidders are interested, they will lower their bid to account for the risks, leading to a lower realization. Despite that, legislative clarity is needed on issues like procedure to deal with the remaining assets and standardised valuation of assets.
Finally, removal of a sale of the corporate debtor as going concern under the liquidation process might defeat the purpose of IBC which is to restructure businesses and maximize the value of assets without killing the businesses. The judiciary has always taken a proactive stance on keeping businesses alive even at the stage of liquidation. The Supreme Court in Arcelor Mittal India Pvt Ltd v. Satish Kumar Gupta observed that since a majority of the employees depend on these businesses, the resolution applicant must try its best to keep the business as a going concern. Further, the Court in Swiss Ribbons established that even in liquidations, the liquidator must consider the option of selling the business of the corporate debtor as a going concern since the legislative intent of the IBC is to ensure the revival and continuation of the corporate debtor.
Moreover, the clean slate principle even extends to the sale of the corporate debtor as a going concern under liquidation apart from approved resolution plans. The “clean state” principle in this context means that once corporate debtor has been sold as a going concern, then all claims, whether resolved or not, will stand extinguished and the buyer can take over the company without any continuing liabilities. This view was confirmed by the NCLAT in KTC Foods Private Limited, wherein the tribunal held that successful bidders of the corporate debtor as a going concern relieves them of any past liabilities under the clean state approach. This will further raise a significant interest from bidders towards going concern sales.
Conclusion
The proposed changes by the IBBI signify a positive step towards streamlining the processes and resolve the operational challenges encountered during the insolvency resolution process. However, it brings with it certain risks and complexities which needs to be carefully managed.
Moving forward, the IBC needs to offer a more comprehensive legal framework related to group insolvencies and shed clarity on procedures related to the part-wise asset resolutions. While post-approval modifications should generally be barred, there must be some exceptions in justified circumstances. Retaining the provision relating to going concern sales under liquidation aligns with objectives of the code as well as judicial interpretation. Its removal could undermine continuation of businesses and employment protection. By addressing these hurdles and setbacks, the IBC can enhance the transparency, efficiency and effectiveness of resolution processes.
– Yarabham Akshit Reddy & Chakkapalli Satya Kaushik
