How the govt proposes to change India's bankruptcy law

The government is set to overhaul its Insolvency and Bankruptcy Code (IBC), with an aim to bring more technology, transparency, and speediness to the corporate insolvency resolution process.

The proposed changes aim to give more power to adjudicating authority, allow mandatory admission of insolvency applications filed by financial creditors, provide a specialised framework for real estate, and expand the scope of pre-packaged insolvency scheme beyond MSMEs, Business Standard reported. 

The government has also suggested the Code may be amended to segregate the concept of the resolution plan from the manner of distribution of proceeds received from the successful resolution applicant.

New mechanism

In a bid to make the process fairer, a new mechanism for an equitable scheme of distribution of proceeds is proposed through which creditors will receive proceeds up to the liquidation value of the company based on the waterfall mechanism. Thereafter, all surplus will then be distributed among creditors based on the ratio of their unsatisfied claims. Any further surplus shall be distributed among shareholders and partners of the company.

The amendments also address cases in which assets of a company and guarantor often intermingle, by proposing a mechanism to include such assets of the guarantor in the general pool of assets available for the CIRP (corporate insolvency resolution process). 

A special window may also be created in the corporate insolvency resolution for the sale of secured assets whose possession has been taken by the secured creditor under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002. This would be done if the guarantor’s and corporate debtor’s assets are linked. 

The government has proposed a state-of-the-art e-platform for a case management system, automated processes to file applications, delivery of notices, enabling interaction of insolvency professionals with stakeholders, storage of records of corporate debtors undergoing the process, and incentivising participation of other market players in the IBC ecosystem. 

“It may also allow regulators and the AAs (adjudicating authorities) to exercise better oversight over their respective domains of functioning through the consolidated information available on the e-platform,” the Ministry of Corporate Affairs said.

To mitigate such delays and value destruction, it is also being considered that CoCs may be mandated to transparently look into competing plans through an appropriately designed challenge mechanism.

Real estate insolvencies

For real estate projects, the ministry has proposed to amend the IBC to enable the transfer of the ownership and possession of a plot, an apartment, or a building to the allottees with the consent of CoCs. This is not allowed currently due to the moratorium under the Code. 

It is also suggested that if insolvency is initiated against a promoter of a real estate project, then CIRP provisions shall apply only to projects, which have defaulted, according to the discretion of adjudicating authority.

In order to discourage frivolous or vexatious applications, the draft proposal looks to give AAs the power to impose penalties. The MCA has observed that several proceedings are maliciously instituted before the AA to delay the conduct of processes. The minimum penalty, it is proposed, should not be less than Rs 1 lakh per day, which may mount to three times the loss caused or unlawful gain, whichever is higher.

The Centre also wants to amend the Code to restrict the right of the promoters -- who can also initiate insolvency under Section 10 of the IBC -- to propose an interim resolution professional.

The Code also proposes to boost the power of the Insolvency and Bankruptcy Board of India to issue a show cause notice without inspection or investigation, if sufficient material is available on record.

Public comments on these changes are invited by February 7.