Contributed by Divyam Shresth Sinha

Introduction

A Resolution Professional (“RP”) is an insolvency professional who is appointed for purposes of Corporate Insolvency Resolution Process (“CIRP”). A resolution plan refers to any plan for insolvency resolution of the Corporate Debtor (“CD”) as defined in Section 5(26) of  the Insolvency and Bankruptcy Code 2016 (“IBC”). Persons interested in submitting the plan and reviving the company are known as Resolution Applicants (“RAs”) under Section 5(25). The plans are presented before a Committee of Creditors (“CoC”) constituted by the financial creditors. CoC has to select a plan after negotiating among themselves. The plan is only approved if 66% or more votes are in favour of it. Later on, the resolution plan is forwarded to Adjudicating Authority i.e., NCLT for granting approval. Once NCLT grants approval, the claims in the plan are frozen and become binding on CD, employees, guarantors, creditors and other stakeholders involved in the resolution plan under Section 31 of IBC. The apex court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 SCC 531, was of the opinion that once the plan is approved undecided claims of liabilities of CD cannot be made. It protects  RA from being weighed down by undecided claims. It is founded on the logic that the RA should possess precise knowledge of the claims. Moreover, NCLT cannot allow RA to withdraw an approved resolution plan in light of the apex court judgement in Kundan Care Products Ltd. v. Mr. Amit Gupta (2020) SCC OnLine NCLAT 670. Even though the provisions of IBC are prima facie considered to be novel still there are certain glaring issues associated with it. 

Complications with CIRP

CIRP can be triggered when there is default by the CD. Section 4(1) provides the minimum amount of default as one lakh. Such a lower threshold of default implies that even a small creditor in cases of minor defaults has the power to start insolvency proceedings against an enormous CD. Moreover, equity shareholders have no role in CIRP even though they are the actual owners of CD.  CoC holds arbitrary powers to demand liquidation of CD during the insolvency process pursuant to Section 33(2). It has to intimate the Adjudicating Authority for liquidation which is under a mandate to allow it. This provision is in stark contrast to objective of IBC of resolving insolvency. Liquidation often results in closure of a firm and loss of substantial number of jobs.

When CIRP begins, RP becomes responsible for managing the company under Section 17 of IBC. However, promoters pose a significant hindrance to day-to-day operations as they desire to take the company back at  low-price. They are able to convince employees and financial creditors not to provide their support for CIRP. Even customers are persuaded by the promoters not to make payment for any kind of service they may have received from the company. The customers often agree to this due to the long-standing affiliation they have built with the promoters over the years. Similarly, vendors also consent that they would not extend the credit period because the company is in CIRP. The RP is faced with obstacles from both ends as it can neither collect all the debtors nor make immediate payments to vendors. This has a negative impact on working capital of company and therefore, the day-to-day operations. Moreover, it is difficult to bring interim finance for a company under CIRP due to the high risk associated with it. The prospective RAs use an information memorandum to determine the value of the company before they submit their Expression of Interest (“EoI”). This memorandum contains crucial information pertaining to the company. It can only be made with the help of promoters as they possess the exact details regarding the company. If they are unwilling to cooperate, the company runs the risk of being undervalued due to paucity of information. Therefore, non-cooperation by promoters can lead to submission of EoIs at a substantially lower value.

Independence of RP

According to Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, RP has to be independent of only the CD. The Regulation does not require that RP to be independent with respect to financial creditor. It has been laid down in State Bank of India vs. Ram Dev International Ltd Company (AT) (Insolvency) No. 302 of 2018 that if there are no disciplinary proceedings going on against a person who is empanelled as a lawyer with any Financial Creditor then even, he can be appointed as a RP. To show biasness “the requirement is availability of positive and cogent evidence” according to the Supreme Court as held in  Kumoan Mandal Vikas Nigam Ltd. vs. Girja Shankar PantAIR 2001 SC 24.Presence of “existing a real danger of bias” is required.

2022 Amendment to CIRP Regulations

Initially, only one RA could submit 1 resolution plan for the entire business of a CD. However, a CD may own multiple assets at various locations. The RAs may prefer selected assets and not necessarily taking over the entire business. The 32^nd report of Standing Committee on Finance observed that allowing RAs to submit resolution plans for specific assets would have a better commercial result. The 2022 Amendment to CIRP Regulations allowed more than one resolution plan for different assets of CD by multiple RAs. As a result, there will be various resolution processes for specific assets. Although the amendment may be seen as a step in the right direction, still it does not tackle the case where there are no resolution plans for a particular asset.

Avoidance Transactions

Transactions undertaken by CD with the intent to benefit management of company and defraud creditors before start of CIRP are called avoidance transactions. In Venus Recruiters v. UOI(2020) SCC OnLine Del 1479the court held that any avoidance application becomes pointless the moment CIRP is finalised even if the application was filed before resolution plan. The decision went against Section 26 of IBC. As a consequence, creditors were losing the recovery amount because of dubious transactions by the CD. In Tata Steel Ltd. v. Venus Recruiters(2023) SCC OnLine Del 155, the court reversed the previous position and held that any avoidance application would continue although CIRP has ended. Now, if the CDs had been involved in an avoidance transaction before initiation of CIRP and an application for the same is filed then it would continue and the CD can be held liable for the same even after CIRP is initiated. The CD cannot walk away scot-free as a result.

Conclusion

IBC has brought sea changes to the insolvency process in India with inclusion of CIRP. Although it was instituted with the objective of speedy settlement, IBBI data has shown that 80% of cases have bypassed the 180-day limit for settlement of disputes. Section 12 provides that the period of 180 days can be extended for 90 more days. However, 75% of cases have even crossed the 270 days limit. The Supreme Court in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta(2019) 2 SCC 1, was of the view that this time limit is exclusive of time spent in litigation. Due to delay in the process the value of company decreases with time. As a result, in the current insolvency regime, the creditors have faced haircut losses as high as 70%. Presently, the buyer is able to get a company and start at a clean slate without being liable for past defaults and other non-compliances. Often the buyer, CD and RP are related to each other and exploit the process. A CD who is not able to pay the creditors can file for insolvency and later the company can be taken over by his near relation. So, in essence he will still be the one managing the company.  Therefore, it is imperative that IBC is reformed on an urgent basis to root out the complications.

Recommendations

 Even though IBC has been successful in protecting businesses from financial hardships, extricating resources from unproductive utilisation and giving the companies a freedom to exit still, it needs to react to the everchanging corporate setting. For this, it can take cue from other jurisdictions. For example, in India, equity shareholders do not have any say in CIRP. In USA, when creditors are paid off and there is residual value left for equity shareholders then a committee of equity shareholders is appointed which consists of the largest equity holders of the corporate debtor. A similar framework can be developed by India as well. Australia has a separate Corporations Act, 2001 for conducting group insolvency proceedings. Even Germany has a group insolvency systematic framework. However, in India, there is no separate legislation that caters to a situation when  entire group consisting of multiple subsidiaries is declared insolvent. Formulation of a specific legislation for group insolvency is worth exploring.