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Changes to bolster IBC process but certain aspects need more debate: Analysts

The ministry has proposed to empower the National Company Law Tribunal (NCLT) to slap hefty fines on those that contravene IBC rules.

insolvency, insolvency and bankruptcy act
The recommendations on prepack and out-of-court resolution (fast track resolution) with optional moratorium and NCLT sanction will take India closer to overseas prepack regimes. (IE)

A broad range of changes to the Insolvency and Bankruptcy Code (IBC), proposed by the ministry of corporate affairs on Wednesday, will help cut delays in the resolution process, prevent erosion of stressed asset value, somewhat discipline errant stakeholders and streamline various processes, analysts said.

However, certain aspects of the recommendations, especially on extending the so-called prepackaged insolvency framework–meant for only MSMEs–to larger entities and a change in the mechanism to distribute resolution proceeds, need to be further debated, some of them said. Moreover, much hinges on the fine-prints of these proposals when they are ratified and their effective implementation, they added.

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As part of a plethora of amendments to the Insolvency and Bankruptcy Code (IBC), the ministry has also pitched for a special framework for real estate to limit bankruptcy proceedings to only insolvent projects and allowing multiple resolution plans for a single stressed firm (in all sectors).

The ministry has proposed to empower the National Company Law Tribunal (NCLT) to slap hefty fines on those that contravene IBC rules. But it has also explicitly clarified that the adjudicating authority must admit an insolvency case if the default is established and need not get into other specifics like the reason for the default, etc, which was delaying the admission of applications.

L Viswanathan, partner at Cyril Amarchand Mangaldas, called the clarification a “very good course correction”. But what will be debated is a change to the IBC waterfall mechanism for distribution of proceeds, he said, adding that the formula adopted in the case of the ILFS group makes its way to the MCA’s discussion paper. “What was evolved for the complex group structure and layered borrowings if it’s applied to standalone corporates may go against fundamentals of credit and order of priority,” he said.

The MCA has proposed a new waterfall mechanism under which creditors will receive proceeds up to the stressed firm’s liquidation value in the order of priority already stipulated (secured financial creditors gets precedence over usually unsecured operational creditors). But any surplus over such liquidation value will be proportionately distributed among all creditors in the ratio of their unsatisfied claims.

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The recommendations on prepack and out-of-court resolution (fast track resolution) with optional moratorium and NCLT sanction will take India closer to overseas prepack regimes. “NCLT’s discretion has been increased in the new measures, so focus will be on strengthening NCLT for effective implementation,” Viswanathan said.

Jyoti Prakash Gadia, managing director at consultancy firm Resurgent India, said, “The underlying intent (of the proposed changes) is to streamline the processes and procedures by the introduction of technology and bringing out clarity in relevant clauses to ensure smoother implementation.”

Based on the past hurdles faced in various provisions and clauses, the ground level issues have been identified and proposed to be rectified step by step. These include, the rule relating to the fast-track mechanism, prepack framework and real estate. “The liquidation process is also sought to be made more open, flexible and equitable to provide comfort to the creditors,” Gadia said.

Yogendra Aldak, partner at Lakshmikumaran and Sridharan Attorneys, said, “Such recommendations, once implemented properly, would result in effective resolution of insolvency.” However, insolvency regulator IBBI “should be conscious that these recommendations should not pave way for further litigations, which will stall the entire process of resolution”, he added.

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First published on: 20-01-2023 at 02:40 IST
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