On 7th November, 2017, the Insolvency and Bankruptcy Board of India (“IBBI”) issued a press release amending the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 (“CIRP Regulations”), and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (“Fast Track Regulations”). With a view to maximize the value of assets of the corporate debtor in a timely bound manner, the IBBI have imposed an additional duty on the committee of creditors to approve the resolution plan which is (i) realistic, (ii) could be successfully implemented, and (iii) can rescue the insolvency business.
IBBI vide its Notification No. IBBI/2017-18/GN/REG019 and IBBI/2017-18/GN/REG020 issued the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) (Third Amendment) Regulations, 2017 (“CIRP 3rd Amendment Regulations”), and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2017 (“Fast Track 3rd Amendment Regulations”), respectively, and appointed 7th November, 2017 (date of publication in the Official Gazette) as the date on which the said regulations shall come into effect. Notably, amendments in the Fast Track Regulations are mutatis mutandis to those carried in the CIRP Regulations. In this write-up, the Author has tried to analyze the amendments to the CIRP Regulations.
Amendment to Regulation 38
Regulation 38 of the CIRP Regulations provides for mandatory contents in the resolution plan. Prior to the amendment regulation 38 of the CIRP Regulations required the resolution plan to – (1) identify specific sources of funds that will be used to pay insolvency resolution process cost, liquidation value due to operational creditor, and liquidation value due to dissenting financial creditor; and (2) provide the term of the plan along with its implementation, management and control of the business and means for supervising its implementation.
Post CIRP 3rd Amendment Regulations, the resolution plan in addition to pre-amendment list shall also provide the details (as defined in the explanation to the sub-regulation (3) of regulation 38 of the CIRP Regulations) of the resolution applicant and other connected persons. Based on the details submitted by the resolution application in the resolution plan, the committee of creditors shall assess the credibility of the resolution applicant and connected persons to take prudent decision while considering the resolution plan for its approval. This amendment cast additional responsibility on the committee to make every possible effort to rescue the insolvent company in the best possible manner. Now, let us analyze the explanations to the sub-regulation (3) of regulation 38 of the CIRP Regulations.
Explanation (i) provides the list of details to be submitted as part of the resolution plan. These details shall be in respect of the resolution applicant and other connected persons. List of details to be provided are as follows –
(a) identity – shall include PAN, Aadhar, Passport, etc.;
(b) conviction for any offence, if any, during the preceding five years – in author’s view, the details of offence(s) made good shall also be provided;
(c) criminal proceedings pending, if any –This clause requires the resolution applicant to provide the details of criminal proceedings to be provided only if such proceedings are pending against him or other connected persons. Notably, any criminal proceedings, during preceding five years though has been closed gets covered under clause (b) above;
(d) disqualification, if any, under Companies Act, 2013, to act as a director – the details of any disqualification faced by the director (i.e., by the resolution applicant or other connected persons appointed as a director) under the Companies Act, 1956 is not required to be presented;
(e) identification as a willful defaulter, if any, by any bank or financial institution or consortium thereof in accordance with the guidelines of the Reserve Bank of India - details with respect to identification as a willful defaulter is required to be provided; however, IBBI seem to have missed the requirement of disclosing the name of the resolution applicant and connected person if appeared in the specific approval list of Export Credit Guarantee Corporation;
(f) debarment, if any, from accessing to, or trading in, securities markets under any order or directions of the Securities and Exchange Board of India, - details of present debarment are required to be provided; and
(g) transactions, if any, with the corporate debtor in the preceding two years – to ensure independence, impartiality or external influence(s) is/are maintained, the details of all transactions entered between the insolvent business and resolution applicant/ other connected persons during the period of preceding two years are required to be disclosed.
Explanation (ii) defines the expression “connected persons” as follows –
(ii) the expression ‘connected persons’ means -
(a) persons who are promoters or in the management or control of the resolution applicant – this clause shall apply if the resolution applicant is working with a firm or a company and if the resolution applicant itself is a company;
(b) persons who will be promoters or in management or control of the business the corporate debtor during the implementation of the resolution plan – if pursuant to the resolution plan there is any change in the promoters or management/ control (can be due to mergers or amalgamation) of the insolvent business then the new promoters, executive functionary and the new management personnel shall be regarded as connected persons and the information as specified in sub-regulation (3) of regulation 38 of the CIRP Regulations shall be disclosed in the resolution plan. Such disclosure will help the committee to take a uniform decision;
(c) holding company, subsidiary company, associate company and related party of the persons referred to in items (a) and (b) – this clause provides for wide coverage. It is pertinent to note that the term “related party” has been defined under section 5 (24) of the Code; however, the definition is in relation to a corporate debtor. Therefore, one will have to read the same definition with a substitution, i.e., the term “corporate debtor” shall be substituted with the expression “persons referred to in item (a) and (b)”.
Amendment to Regulation 39
Regulation 39 of the CIRP Regulations provides the provisions for approval of resolution plan. Prior to the amendment sub-regulation (2) of the regulation 39 of the CIRP Regulations required the resolution professional to present all resolution plans which meet the requirement of the Code and regulations made thereunder to the committee for its approval. Post amendment the resolution professional along with presenting the resolution plan which meet the requirements of the Code and the regulations made thereunder will have to provide the details of preferential (s. 43), undervalued (s. 45), extortionate (s. 50) and fraudulent (s. 66) transactions, if any, observed, found or determined by him and shall also put forward the orders, if any, of the adjudicating authority in respect of such transactions.
The 3rd Amendment to the CIRP Regulations and the Fast Track Regulations cast additional responsibility on the Committee of creditors and resolution professional to identify and approve the best resolution plan which can rescue the insolvent business and determine such transactions which have had/ are having adverse effect on the business of such insolvent company. This step of IBBI will surely help to achieve the key objective of protecting the interest of stakeholders and rescuing the insolvent business.
The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the Author. Compliance Calendar LLP and the Author of this Article do not constitute any sort of professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove. Compliance Calendar LLP shall not be responsible for any loss or damage in any circumstances whatsoever.