Monthly review, disclosure of fair value: IBBI bats for transparency

Mandatory monthly review of progress of resolution process by the Committee of Creditors (CoC), disclosure of fair value to stakeholders are among the amendments proposed by the Insolvency and Bankruptcy Board of India (IBBI) to make the Insolvency and Bankruptcy Code (IBC) process more transparent.

IBBI has proposed that creditors dissenting on a resolution plan under the IBC should be entitled to claim lesser of the two amounts - the resolution amount or the liquidation value. 

The insolvency regulator, in its discussion paper released on November 1, said that dissenting creditors often get higher entitlement than is due to them when the approved resolution value is less than the liquidation value.

Under the current regulations, such creditors get their claims as part of the liquidation value. 

“The major issue with such decision making is that if a large number of

financial creditors dissent to a resolution plan seeking higher entitlement, it may push the corporate debtor towards liquidation ultimately defeating the objective of the Code, and also against the interest of such dissenting creditors,” IBBI said. 

Experts said this will motivate CoC members in ensuring timely decision making and value maximisation within the provisions of law.

“This  has been a long awaited change. This would have further strengthened the process if it would have been combined with changes in regulation mandating participation of senior members from financial creditors,” said Bhrugesh Amin, Partner, Business Restructuring Services, BDO India. 

IBBI has proposed seven amendments and sought public comments by November 22, 2023. 

It has also proposed dividing the resolution plan into two parts with Part A dealing with the payment under the resolution plan and feasibility & viability of the plan. The second part B would deal with distribution to the various stakeholders. 

“This will enable the adjudicating authority to first approve the resolution plan effectuating control by the resolution applicant so that inflow can take place and the corporate debtor may start functioning again,” IBBI said. 

The proposed amendment is in line with the proposed amendments to the IBC, which talk of bifurcation of resolution and distribution of funds.  

“Realising the inherent weaknesses in the existing mechanism, changes and improvement is sought on a wide variety of issues. The proposals presented in the discussion papers are expected to bring about comprehensive changes to make the mechanism robust, more effective and efficient while removing the existing shortcomings in the system,” said Sudhir Chandi Partner. Resurgent Resolution Professional LLP. 

Besides, proposing that the fair value should not just be available with the insolvency professional, CoC and valuers but also be disclosed in the Information Memorandum for all stakeholders, IBBI has also suggested that before finalisation of valuation report, valuers shall explain their methodology to the CoC. 

The amendment to CIRP regulations also includes a proposal that the insolvency professional should seek approval of all components of the insolvency resolution process cost, including the expenditure incurred for the ongoing operations of the corporate debtor.

“To streamline the process and improve the monitoring of the CoC on the CIRP process, it is considered necessary to explicitly provide that RP has to take approval of CoC for all the insolvency resolution process cost incurred by the RP including costs incurred in running the business of the CD as a going concern,” IBBI said in its discussion paper. 

IBBI has also proposed to clarify that the resolution professional shall continue to discharge his responsibilities for the period when the application seeking an extension of the corporate insolvency resolution process is filed till the application is decided upon by the adjudicating authority.