IBBI Proposes Two-Stage Process To Speed Up Bankrupt Firms’ Recovery

IBBI Proposes Two-Stage Process To Speed Up Bankrupt Firms’ Recovery

Strap – The regulator has sought public comments by 25 February on the proposed changes

The Insolvency and Bankruptcy Board of India (IBBI) has proposed regulatory amendments, including a two-staged approval plan for rescue, part-sale of stressed firms and a mechanism to handle bankruptcy of interconnected entities of a corporate group.

In a discussion paper, the Board suggested that the financial bid and the basic implementation framework of the resolution plan could be approved early, allowing the applicant to take over the stressed firm and implement the plan.

The regulator added that subsequent hearings by the National Company Law Tribunal (NCLT) could address inter-creditor disputes, distribution of resolution proceeds, and other aspects.

While the Corporate Insolvency Resolution Process (CIRP) must be completed within 180 days and a 90-day extension is granted on approval by the NCLT, the process usually stretches due to litigation. A 330-day deadline, including the time spent on legal proceedings, is rarely maintained, leading to asset value erosion.

The IBBI claimed that in 71 percent of cases where resolution was in progress as of September 2024, the 270-day timeframe was breached.

The regulator has sought public comments by 25 February 25 on the Streamlining Processes under the Insolvency and Bankruptcy Code (IBC): Reforms for Enhanced Efficiency and Outcomes.

The plan was to roll out a new mechanism for greater collaboration among financial creditors overseeing the CIRP, involving a corporate group’s interconnected entities.

The mechanism could include joint hearings, the appointment of a common resolution professional (RP) for the relevant entities, information-sharing protocols and coordinated timelines.

The IBBI stated, "The amendment aims to increase efficiency, reduce costs, and improve outcomes in cases involving multiple interconnected entities undergoing CIRP simultaneously.”

It added that a formal framework was necessitated after the interconnected nature of group companies delayed insolvency resolution in some cases. These include Videocon, Era Infrastructure, Lanco, Educomp, Amtek, Adel, Jaypee and Aircel.

The regulator would simultaneously allow the RP to invite rescue plans for the stressed company as a whole and its specific businesses or assets. This would eliminate the requirement to seek asset-specific plans if the entire company fails in its resolution plan.

It explained, "By enabling concurrent invitations, the resolution process can reduce timelines, prevent value erosion in viable segments, and encourage broader investor participation.”

Yogendra Aldak, a partner at Lakshmikumaran & Sridharan Attorneys said the proposed amendments "aim at strengthening the decision-making process of the committee of creditors (CoC)."

Aldak added that the mandatory regular review of operational expenses by the CoC, particularly for leased properties, would lead to better management of the financial sustainability of the stressed firm.

Meanwhile, the IBBI also plans to boost the regulatory framework for avoidance transactions. This was about the deals made by a company nearing bankruptcy that could be detrimental to lenders.

It suggests enhanced disclosure needs and regular updates on newly-identified avoidance transactions and related applications. The disclosed avoidance transactions could be incorporated into resolution plans. The creditors must pursue it for their benefit or transfer it as part of the resolution plan.

The amendments are especially for leased properties. The RP must present an assessment of operational expenses to the CoC within 30 days of its formation. A quarterly review of expenditures in the CoC meeting would be mandatory. The RP would have to present the resolution plans to the CoC, without assumptions of compliance with the norms.

Similarly, a stressed firm must submit a ‘statement of affairs’ including financial statements for the previous three years and its response seeking insolvency proceedings.

Manmeet Kaur, a partner at the law firm Karanjawala & Co stated, "If the proposed changes are implemented, they can improve the timelines of processes leading to faster resolution and accountability with reduced litigation.”

Meanwhile, the regulator has eased the liquidation process by scrapping the provisions on a firm’s sale as a concern in Liquidation Regulations.

For an easy fund flow to the stressed firm during the CIRP, the regulator will empower the CoC to invite financiers to attend its meetings as observers, with no voting rights. This would enhance the financiers' trust in the ability of the stressed firms to pay back.

Regarding amendments to insolvency regulations including personal guarantors to corporate debtors, the RP must notify the non-submission of a resolution plan. Thereafter, the NCLT may terminate the resolution process for the personal guarantors, "enabling the debtor or creditor to file a bankruptcy application.”