Interim resolution professionals acting on behalf of lenders should limit the operations of such companies to the minimum and ensure they are not mechanically run as a going concern in the first 30 days of bankruptcy proceedings when the panel of creditors is being set up.
Once the panel of creditors is formed, the resolution professional should submit a ‘going concern assessment’ about the viability of the distressed business at its first meeting so that unviable ones are not sustained with unjustifiable costs, the IBBI proposed in amendments to corporate debt resolution regulations.
The regulator also proposed allowing delayed claims by creditors, exclusion of related-party operational creditors and a requirement for creditor committees to maintain detailed records of their deliberations to enhance transparency. The draft regulations were released late on Monday and are open for public feedback and suggestions till 10 March.
“Based on feedback received from stakeholders and issues observed during the conduct of corporate insolvency resolution processes, the Board has identified certain areas where greater procedural clarity is required to avoid inconsistencies, disputes, escalation of costs, or sub-optimal value outcomes,” it said in the discussion paper. “The proposed amendments are intended to strengthen creditor oversight, improve procedural discipline, and reinforce value maximization.”
The IBBI suggested that delayed claims from creditors should not be excluded from the debt resolution process, and those that are acceptable by the resolution professionals have to be placed before tribunals to condone the delays.
Removing ambiguity
“The proposed regulations reaffirm that the authority to adjudicate claims and condone delays rests exclusively with the adjudicating authority (AA),” explained Daizy Chawla, a senior partner with S&A Law Offices. “This clarification is relevant in view of instances where certain claims have not been placed before the AA due to the absence of a recommendation from the committee of creditors. The proposal seeks to remove such ambiguities and reinforce the statutory role of the adjudicating authority.”
The regulator sought to exclude related-party operational creditors such as suppliers linked to promoters from the panel of creditors in certain cases so that they do not influence decision-making.
Vivek Iyer, partner and financial services risk advisory leader at Grant Thornton Bharat, said the proposed revision seeks to strengthen the documentation of resolution plans to capture the feasibility of plans and thereby reduce disputes, build independence by excluding related operational creditors from the committee of creditors and develop practical, outcome-oriented solutions around the admission of delayed claims for operational creditors.
“These changes are aligned with the principle of deregulation that the government intends to drive to reduce frictions to improve operational efficiency and increase overall economic growth,” said Iyer.
The IBBI suggested the panel of creditors should record in detail their decision approving bids from new investors for the distressed entity, including the credibility of the investors, certainty of implementing the corporate revival plan and the availability of funds.
“This enhanced documentation requirement is expected to strengthen the transparency of creditors’ decision-making, provide clear evidentiary support in the event of judicial scrutiny, and reduce litigation by ensuring that the rationale behind decisions is contemporaneously recorded,” said Chawla of S&A Law Offices.
Creditors’ meetings
The regulator noted that the depth and detail of the recording of creditors’ meetings vary across cases. Where discussions are not adequately reflected in the record, the basis of the creditors’ commercial decisions may not always be evident.
Creditors should also record expected recovery compared to the fair value and liquidation value of the entity as well as the adequacy of market discovery attempted, including by way of any challenge mechanism or re-invitation of bids, the IBBI proposed.
The regulator pointed out that while the Insolvency and Bankruptcy Code (IBC) seeks to revive distressed companies, sustaining their operations during debt resolution must be guided by commercial prudence and expected value outcomes. The debt resolution costs must be proportionate, justified and subject to effective creditor oversight, it said.
Decision-making on continuing a bankrupt company’s operations should be based on structured financial assessment rather than a default practice, the IBBI said, proposing that the costs incurred by the company’s lender-appointed administrator in the initial days of bankruptcy proceedings should support minimal operations to prevent value erosion, maintain essential services, protect assets and to comply with legal requirements.
Based on the resolution professional’s viability test report, creditors must decide at their first meeting whether to continue the operations of the bankrupt business. Prior creditor approval is needed for all subsequent expenditure, the IBBI said.
The resolution professional has to place periodic updated estimates of income, expenses and cash flows before the creditors and seek approval for costs for the period until the next meeting. A comparative statement of actual costs incurred versus previously approved estimates will also need to be presented, ensuring greater financial discipline and oversight throughout the debt resolution process, explained Chawla.
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