IBC Bill proposed wider look-back period for preferential transactions

Amendments target asset exclusion tactics, enable partial resolutions, and streamline insolvency process

In order to capture a broad range of transactions, particularly those undertaken to exclude assets from the insolvency process, the Insolvency and Bankruptcy Code (IBC) Amendment Bill has amended the look-back period, which will be counted from the initiation of insolvency instead of its commencement. The Centre on Tuesday introduced the IBC Bill in the Lok Sabha, proposing a wide range of reforms from group and cross-border insolvency to creditor-initiated insolvency resolution process. 

The Bill has been referred by the government to a select committee. 

In cases where the admission of an application takes longer than 14 days, as required under the Code, the look-back period for preferential transactions may not be able to capture a significant portion of transactions that occurred before the filing of an application. 

The government was concerned that this could give corporate debtors a perverse incentive to delay admission of the application for commencement of the insolvency resolution process to reduce the scope of an avoidable transaction. 

“The threshold for the look-back period for preferential transactions, therefore, has been adjusted to more effectively capture a broader range of pre-filing transactions, particularly those undertaken in anticipation of the commencement of the insolvency resolution process to exclude assets from the process,” the Bill stated.  

“The resolution professional and liquidators should do a careful analysis so that genuine business transactions do not get counted as preferential transactions. And, everything is not pushed as avoidance or fraudulent. There are a huge number of such cases already pending in the National Company Law Tribunals (NCLTs),” said Surendra Raj, Partner, Grant Thornton Partner.  

Aligning with the recent regulations introduced by the Insolvency and Bankruptcy Board of India (IBBI) — allowing part resolution of assets — the Bill has also inserted a similar provision to Section 5 of the Act. It is to allow “merger, amalgamation, demerger and sale of one or more assets of the corporate debtor.” 

An important clarification brought in the Bill relates to the assurance that government concessions such as licence, permit, registration and quota, by the Centre, state, local authority or sectoral regulator would continue as part of a resolution process.  “Several similar assets are languishing before the courts, suffering value erosion and being prejudicial to all stakeholders. Apart from enhancing the efficacy of IBC, this should also make these projects bankable by project financiers. This is indeed a significant step, and in absolute consonance with the stated objectives of the IBC,” Soumitra Majumdar, partner, JSA Advocates & Solicitors, said. 

The amendments have provided for a continued supervisory role of the committee of creditors (CoC) even during liquidation. In order to address delays on account of inter-creditor disputes, the Bill has said that the adjudicating authority may, before rejecting the resolution plan, give notice of an additional 30 days to the CoC to rectify any defects in the resolution plan. 

The proposed amendments enable the adjudicating authority to first approve implementation of the resolution plan. Then, by a separate order, it can approve the manner of distribution, thereby segregating the two issues.  

Hitting fast forward 

• This change aims to prevent corporate debtors from delaying applications to exclude assets
• The amendment also proposes allowing for the part resolution of a company’s assets
• Government concessions like licenses and permits will continue during the resolution process
• The adjudicating authority can now also approve a resolution plan and distribution separately
• A new provision allows the committee of creditors 30 days to rectify defects in a plan