Proposed Amendments To The Insolvency And Bankruptcy Code

Insolvency and Bankruptcy Code, 2016, as amended (“Code”) regulations claim that countless cases of failing real estate businesses, including significant players like Jaypee Infratech, and Supertech, have been stalled at various stages of insolvency procedures over the past few years. It is being estimated that 344 corporate debtors involved in construction and real estate operations had been admitted into the CIRP as of September 2022, according to data provided by the Insolvency and Bankruptcy Board of India (the “IBBI”).

The characteristics of this industry present the most obstacles to insolvency resolution, particularly because the varied interests of real estate project allocators do not line up with the CIRP’s plan. Whereas the financial creditors’ interest is in the loan repayment, the allottees’ interest is in the ownership and possession of the unit (usually with haircuts). The real estate allottees, who have been classified as financial creditors with voting rights due to the size of the projects, typically make up the majority of the committee of creditors, but they lack the financial knowledge or common sense to make decisions regarding the viability of the resolution plans.

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Insolvency and Banktrupcy Code

The IBC was a game-changing piece of economic law that changed how the nation handles insolvency resolution and liquidation. Over the course of its six-year existence, the legislature has consistently worked to smooth out any kinks through timely interventions in order to make it a strong piece of legislation. This year’s beginning saw the Ministry of Corporate Affairs release an intriguing discussion paper that sought feedback from the general public on potential future reforms. The document highlights more than 40 suggested improvements to address various issues found in recent years. Many of the suggestions are positive, but some demand further consideration.

Separation Between The Distribution System And The Resolution Strategy

MCA has proposed that the Code be changed to separate the idea of the resolution plan from the method of proceeds distribution. First, this appears to be a good idea. Although the change would speed up approval, it is likely to put the creditors in a bad situation because the plan might be put into action before the creditors get plan proceeds. The creditors’ vote on the resolution plan can be cast before the creditors’ vote on the distribution mechanism, according to this suggestion. Unaware of their rights under the plan, creditors might not be able to assess whether it would be profitable for them to support or oppose the resolution plan.

Recommending A Distribution Method

The report suggests implementing a “objective formula” to share plan proceeds fairly. According to the priority set forth in Section 53, the creditors will thereafter receive proceeds for their claims up to the corporate debtor’s liquidation value. Any excess over that liquidation value would be equitably allocated among all creditors in proportion to the value of their unmet claims.

First off, the consideration of security interests and inter-se priority in a resolution scenario is the most pressing issue facing creditors today. This suggestion does not address this issue. This problem, which requires immediate legislative resolution, has gone unaddressed. Second, the idea of mandating a rigid distribution system directly conflicts with the firmly established IBC principles and may lead to an instance of over-legislation. This one-size-fits-all system denies creditors the discretion to craft a plan that satisfies their requirements. Third, this suggestion ignores situations where the resolution amount is less than the liquidation value since it implies that the resolution amount will always be higher than the liquidation value.

Eliminating Redundant Procedures During Liquidation

The Code anticipates a repetition of several procedures already completed during the CIRP, such as consolidation, verification, admission/rejection, and claim valuation, when a corporate debtor enters liquidation. In order to reduce delays, MCA is thinking of eliminating these stages. Although well-intentioned, these processes shouldn’t be entirely eliminated. Information acquired during the CIRP needs to be updated due to the passage of considerable time. Moreover, this plan does not take into account any subtle variations between the procedures. A liquidator, for example, has the authority to accept or reject claims, in contrast to a resolution specialist. In a liquidation scenario, the same actions taken again result in different outcomes. It would be negligent of the legislature to accept these as a simple duplication.

Major Adjustments Still Need Clarification.

Some significant measures are geared towards expediting fast-track insolvency and improving the pre-packaged insolvency procedure, which has received a lot of criticism. Another such suggestion is the potential for real estate-specific CIRP, which is being lauded as a cure-all for homebuyers.

It would be premature to remark on these concepts in the absence of details because the devil is in the details. But, at first glance, it appears that there are gaps. For instance, the notion that the NCLT should limit its involvement in fast-track insolvency to the approval of a resolution plan fails to take into consideration the challenges that an uncooperative management would provide. Modest adjustments to the pre-pack insolvency procedure fall short of resolving the fundamental problems of an unrealistic deadline and the underlying lack of confidence between creditors and promoters.

Project-specific CIRP is intriguing in theory, but it might not be effective in practise. Each project is frequently housed under an SPV, in which case this amendment’s benefits would not be applicable. Other times, there is almost any true independence between the projects because developers frequently combine resources, money, etc. The IBC’s viability depends on details, thus it would be helpful to read the small print.

Cross-border and group insolvency are two pressing issues that are not addressed in the consultation document. The report, in any case, gives one hope that the legislature is eager to change course.

Author: Abha Singhal, A Student at Rajiv Gandhi National University of Law, Punjab, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

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