Debtors raise concerns on resolution rules under insolvency code

Creditors are going ahead with insolvency proceedings initiated against 12 firms under the new IBC

Even as creditors are going ahead with the insolvency proceedings initiated against 12 companies under the new Insolvency and Bankruptcy Code (IBC), the latter are raising concerns on the procedures for appointment of Interim Resolution Professionals (IRPs). 

It appears some of the companies have approached the Securities and Exchange Board of India (Sebi) and other authorities for clarity on whether the current securities law, especially on insider trading and the takeover code, would apply.

“Some contentions have been raised in the insolvency proceedings. We are studying the feedback received,” said a regulatory official. 

Under the IBC, if a borrower is unable to pay the debt in a given time, a creditor can initiate insolvency resolution proceedings. Either a creditor or debtor company has to file an application, with proof of default, to the National Company Law Tribunal (NCLT) for initiating the process of resolution. The IRP, within seven days of taking charge, will appoint a registered valuer to determine the liquidation value of the debtor. This would be computed in line with internationally accepted valuation standards, after physical verification of inventory and fixed assets.

“The entire exercise requires a great amount of credibility. IRPs should ensure they do not compromise the values of the company. Beside, they should be equipped enough to handle the complexities,” said a company official, who requested anonymity. 

That apart, there are other concerns. "The internal advisory committee panel takes control of the company and supersedes its board of directors. The committee will also engage IRPs who will advise creditors on how to restructure. This committee will have all the rights to examine and inspect price-sensitive information. This would impose the certain obligation on board members, bound to give information in the circumstances,” said Siddharth Shah, partner, Khaitan & Co.

Yet, Section 3 of the insider trading rules prohibit communication of unpublished price-sensitive information relating to a company or securities listed. However, it also says sharing of information for legitimate purposes is part of the duties or legal obligations.

"The onus is on the panel members. They are the ones who are in possession of privileged information and are bound to safeguard that. However, there are instances where rules have been abused in such arrangements or by a government-appointed committee,” said Shriram Subramanian, managing director at InGovern Research Services.

On June 13, the Reserve Bank of India said it had identified 12 large stressed accounts that would need to be resolved via the IBC. These are accounts to which lenders have exposure of more than Rs 5,000 crore, more than 60 per cent of which are recognised as non-performing asset. The extent of the problem can be gauged from the fact that around Rs 10 lakh crore of loans are classified as either non-performing or stressed.