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24 Jan 2018

Insolvency Resolution Process: Enhanced Checks and Balances

Insolvency Resolution Process: Enhanced Checks and Balances

The Insolvency Resolution process regulation were recently amended[1] to ensure that resolution plan proposed for Corporate persons under Insolvency & Bankruptcy Code, 2016 (“Insolvency Code”) shall contain certain details of resolution applicant and other connected person to assess the credibility of such persons. Further, the amended regulation also provided for submission of all resolution plans to the Creditors committee along with the details of preferential transaction, undervalued transactions, extortionate credit transactions and fraudulent transactions to enable the Creditors’ committee to make an informed decision.

In the above background to keep the insolvency resolution process efficient and not vitiated or misused by any unscrupulous person to their own benefit, an ordinance has been promulgated to amend Insolvency Code (“Ordinance”)[2]. It aims to provide for prohibition of certain person from being a resolution applicant and provide for additional requirements for submission and consideration of resolution plan before its approval by creditor’s committee.

The highlights of the changes introduced by the Ordinance is as below:

A. Concept of Resolution Applicant redefined

The Resolution Applicant definition has been redefined. The Resolution plan can be submitted only by invitee of resolution professional. The invitee can submit the resolution plan individually or with any other person.  An invitation to propose a resolution plan can be extended to any person who is:

  1. eligible to be a Resolution Applicant;
  2. fulfils the criteria as laid down by resolution professional with approval of Creditor’s committee; and
  3. fulfils other conditions as specified by Insolvency Board.
B. Disqualification for Resolution Applicant

The ordinance prohibits following category of persons to be resolution applicant:

  1. undischarged insolvent;
  2. wilful defaulters;
  3. persons associated with year long non-performing assets;
  4. convict of any offence punishable with imprisonment for two years or more;
  5. persons disqualified to act as a director;
  6. Persons barred from trading or accessing the securities markets; or
  7. Existing Guarantor of a corporate debtor under insolvency resolution process or liquidation under insolvency code;

Any person falling under the above categories, individually or jointly with any other person cannot be resolution applicant (Disqualified person). Any connected person of Disqualified Person is also ineligible to be resolution applicant. Connected Person means a promoter or management or controller of Disqualified Person, or the promoter or management or controller of the business of the corporate debtor or   the holding company, subsidiary company, associate company or related party of a Disqualified Person or corporate debtor.

C.  Disqualified Person’s claim

Liquidator is barred from selling any property or actionable claims of corporate debtor to any person who is not eligible to resolution applicant.

D. Additional Powers to Insolvency Board

Board has been empowered to provide for the conditions for eligibility of the resolution applicant. It will also provide the requirements to be considered by Creditors committee before approving an insolvency resolution plan.

E. Residuary Penalty

Contravention of Code, rules or regulation for which no penalty has been provided, shall attract fine of INR 1 Lakh – 2 crores.

F. Application of Code

Section 2 of the Insolvency Code has added two more categories i.e. personal guarantors of Corporate debtors and Proprietorship firms on which the Insolvency Code applies.

The Ordinance, therefore, aims to prevent undesirable persons from becoming a resolution applicant and thereby misusing or vitiating the Insolvency resolution process. Wilful defaulters, habitually non-compliant, convicts, otherwise disqualified person under various acts are now prohibited to be part of resolution process. The amendment also provides certain checks to be observed by Creditors’ committee before approving the resolution plan to ensure its viability and feasibility of the resolution plan. The absence of unscrupulous persons in resolution process as well as the evaluation of the resolution plan’s viability and feasibility prior to its approval will definitely increase the probability of successful resolution of insolvency in a timebound manner.

[1] Insolvency and Bankruptcy Board of India (Insolvency Resolution process for Corporate Persons) (Third Amendment) Regulations, 2017, IBBI/2017-18/GN/REG019, dated November 7, 2017.

[2] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, dated November 23, 2017.

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