What to expect from India’s amendments to CIRP regulations

By Shardul Shroff and Shreya Prakash, Shardul Amarchand Mangaldas & Co
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On 30 September 2021, the Insolvency and Bankruptcy Board of India (IBBI) issued amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021. Briefly, these amendment regulations make three modifications to the IBBI (Corporate Persons Insolvency Resolution Process [CIRP]) Regulations, 2016. Each of these is discussed in detail below.

Creditors
Shardul Shroff
Executive chairman
Shardul Amarchand Mangaldas & Co

Guidelines for CoC

First, the amendment regulations require that the committee of creditors (CoC) – which up until now has had almost complete flexibility to make decisions in respect of corporate debtors undergoing the CIRP – discharges its functions and exercises its powers in compliance with guidelines issued by the IBBI. However, these guidelines have not yet been introduced. According to draft guidelines published by the IBBI, these are likely to lay down principles that the CoC should abide by while discharging their functions, such as integrity, impartiality and objectivity. The need to introduce this amendment appears to have arisen from recent criticism of how members of the CoC conduct themselves. In particular, in August, a parliamentary standing committee made recommendations that members of the CoC should abide by a code of conduct that will define and circumscribe their decision-making.

Even as we await the guidelines for regulating CoC conduct, an important legal issue is whether the IBBI, which is not specifically empowered to regulate financial creditors, has the requisite power to issue guidelines relating to their conduct. Equally, as the IBBI is specifically empowered only to take enforcement action against specified regulated entities, which do not encompass financial creditors, it is worth considering how the guidelines will be enforced. One way to enforce these guidelines may be to consider them “justiciable”, and to file applications before the National Company Law Tribunal (NCLT) for their breach. However, this may be concerning if it makes the decisions of the CoC subject to extensive litigation, overturning established jurisprudence that has held that the NCLT is not allowed to interfere with the CoC’s “commercial decision-making”.

insolvency
Shreya Prakash
Associate
Shardul Amarchand Mangaldas & Co

Amendments relating to process

Second, the amendment regulations provide that the invitation for expressions of interest, the request for resolution plans, the evaluation matrix and the resolution plan cannot be revised more than once. They also disallow the CoC from considering resolution plans that are: (1) received after a certain time; (2) received from persons who are not part of the final list of prospective resolution applicants; and (3) not compliant with section 30 of the Insolvency and Bankruptcy Code, 2016.

These changes were introduced against the backdrop of an ongoing debate on prioritising processes or outcomes in insolvency. While the code and the accompanying regulations lay down a linear process to conduct a marketing exercise and choose resolution plans, the judicial precedent has largely allowed stakeholders to deviate from this process, as long as this results in better outcomes for the debtor. However, various critics have argued that this precedence to outcomes has caused time and outcome uncertainty, which may impact prospective resolution applicants’ willingness to place a reasonable and timely bid ex-ante, and deter interest in utilising the process. With these changes in force, it is likely to become more difficult for stakeholders to justify deviations from the process. However, a close watch would need to be kept on the judicial treatment of these amendment regulations. Should they be considered directory, we may still see cases of deviation being allowed in the future.

Swiss challenge

Finally, the IBBI has now also clarified that the CoC can “use a challenge mechanism to enable resolution applicants to improve their plans”. This clarification has been introduced to allow the CoC to use different options to encourage value maximisation. While the regulations do not explain what kind of challenge should be introduced, they provide that the challenge may be used to improve plans. Given this, we expect that CoCs could use “Swiss challenge” style structures to allow resolution applicants to improve their plans, as under the pre-packaged insolvency resolution process. This is likely to be structured so that at least the two best resolution plans are allowed to compete with each other for a specific period.

Given the flexibility of the CoC, it was expected that the IBBI would make it mandatory for them to disclose if they intend to conduct a challenge process, and how they intend to do so ex-ante. However, this has not been done. How challenges are used in the future will have to be closely followed to understand the impact of this clarification.

Shardul Shroff is the executive chairman and Shreya Prakash is an associate at Shardul Amarchand Mangaldas & Co

Shardul Amarchand Mangaldas & CoShardul Amarchand Mangaldas & Co

Express Towers, 23rd Floor,
Nariman Point, Mumbai,
Maharashtra 400 021, India

Contact details:
Tel: +91 22 4933 5555
Email: shardul.shroff@amsshardul.com
shreya.prakash@amsshardul.com