Ibbi proposes coordinated insolvency resolution for interconnected entities

The Insolvency and Bankruptcy Board of India (Ibbi), in a discussion paper, has sought a series of amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) regulations, including allowing invitation of resolution plans concurrently for both the company under insolvency and its specific businesses or assets.

 

“This proposal removes the requirement that resolution professionals (RPs) can only seek asset-specific plans after attempts to invite resolution plans for the entire corporate debtor have failed,” the insolvency regulator said.

 

Ibbi has noted that the current IBC process treats each entity as a standalone unit, overlooking the intricate web of interdependencies often present in modern business ecosystems.

 

 

It said that the increasing prevalence of complex corporate structures with intertwined operations and finances in sectors such as real estate and power generation, among others, necessitates a more nuanced approach to insolvency resolution.

 

“The introduction of a regulated mechanism for coordination of corporate insolvency resolution processes (CIRPs) of interconnected entities is a push towards the much desired but delayed group insolvency framework. This amendment, if it sees light of the day, will introduce a single RP for such group entities and enable the consolidated acquisition of assets in the Indian stressed assets market,” said Sukrit Kapoor, partner, King Stubb & Kasiva, Advocates and Attorneys.

 

Recent insolvency cases such as Videocon Industries Ltd and Srei Infrastructure Finance Ltd have underscored the need for a more sophisticated approach to interconnected entities.

 

Ibbi said the current framework misses the crucial opportunities to capitalise on synergies and mutual dependencies within corporate groups.

 

In 2019, a consortium of banks, led by State Bank of India (SBI), had asked National Company Law Tribunal (NCLT), Mumbai Bench, to allow substantial consolidation of the group of 15 companies under Videocon.

 

NCLT held that while there is no single yardstick on the basis of which a motion for consolidation can or cannot be approved, there are some checks and parameters which can be put in place.

 

“Though the NCLT Mumbai's judgment in the Videocon Industries case was a positive step towards introducing consolidation of the CIRP, the absence of a statutory mechanism had made implementation difficult. Thus, in the long run, such a proposal would be beneficial for enhancing the effectiveness of the resolution process,” said Piyush Agrawal, partner, AQUILAW.

 

Ibbi has suggested joint hearings, common resolution professionals, information sharing protocols and coordinated timelines for coordination of insolvency processes across interconnected entities. It was observed that the absence of a formal mechanism for coordinating CIRPs across interconnected entities leads to inefficiencies, escalated costs, and potential conflict, Ibbi said.

 

Ibbi has proposed to amend the CIRP regulations to make it mandatory for the resolution professional to present all resolution plans received by the Committee of Creditors (CoC) regardless of their compliance status.

 

However, the resolution professional would be required to provide a detailed compliance report to the CoC, highlighting any areas of non-compliance with IBC provisions as well.

 

Some experts feel the move shows that the initial reliance on resolution professionals under the IBC framework seems to be diluting, and the trend is more reliance on CoCs to drive the process with each amendment.

 

“Granting power to CoCs to review each expenditure on goods and services will make the CoC micro-managing and over monitoring the operation of the corporate debtor and may render the RP quite powerless. Balance of power between the RP and CoC should be maintained while bringing changes and amendments to the Code,” said Pranava Charan, Associate Partner, IndiaLaw LLP.

 

The discussion paper has also noted the provision of moratorium being applied incorrectly in some cases. It has suggested measures such as mandatory regular review of significant operational expenses especially with respect to leased properties. Ibbi noted that in many cases, significant operational expenses, including current dues for leased properties, are not being paid during the CIRP period, leading to unreasonable accumulation of costs.

 

In order to enhance the attractiveness of interim financing for companies undergoing insolvency, Ibbi has proposed to amend the CIRP regulations to empower the CoC to decide on inviting interim finance providers to attend CoC meetings as observers, with no voting rights.

 

“This will enhance transparency, allow better risk assessment, and foster greater participation from interim financiers. It will ultimately improve the resolution process's efficiency and effectiveness,” said Ketan Mukhija senior partner, Burgeon Law.

 

Interim finance ensures that the corporate debtor continues as a going concern during the resolution period.