Live Mint, January 19, 2023
The ministry of corporate affairs on Wednesday proposed major changes to the six-year old Insolvency and Bankruptcy Code (IBC) which include expanding the scope of a simplified bankruptcy regime meant for small businesses to a broader range of companies, a customized bankruptcy regime for the real estate sector, quicker bankruptcy admissions in tribunals and a new challenge mechanism for investors bidding for distressed assets.
The ministry has sought comments on the proposals by 7 February, which indicates that a bill to amend the Code may be moved in the later part of the budget session of Parliament starting end of this month.
In a major reform measure, the ministry has proposed that the pre-pack insolvency regime which applies to small businesses, could be expanded to other specified classes of companies too. The advantage of this scheme is that most of the corporate restructure related work is done informally and shareholders and the lenders approach a tribunal only in the last leg to secure its seal of approval, even as the existing management which is well versed in the business’ operations continues to remain in control.
The ministry proposed that the IBC be amended to include “prescribed categories” of corporate debtors in the pre-pack regime in addition to micro, small and medium enterprises. Also, to initiate such insolvency proceedings, only 51% of financial creditors’ approval may be needed, down from the 66% which is the case now. According to the proposal, this would help in quicker and more efficient decision making.
The proposals also seek to omit certain provisions that allow resolution professionals to convert a pre-pack insolvency process to the normal bankruptcy proceedings involving management change. Since the committee of creditors has the discretion to terminate the pre-pack insolvency resolution process at any stage if it believes that it is not viable or the management is involved in any fraudulent activities, this discretion should serve as a sufficient safeguard against abuse of the process, the proposal said.
Mint had reported on 3 January that the government was planning to let defaulting managements to retain control of their companies in certain cases as suggested by the RBI.
The ministry also proposed a customised bankruptcy resolution framework for real estate sector as the interests of lenders and different home buyers, who are also classified as financial creditors, differ. Also in many cases, only individual housing projects may get into financial problems and not the entire company. Therefore, the ministry proposed that IBC may be applied to real estate projects with necessary modifications.
The ministry also proposed to drop a provision in existing law allowing a company voluntarily filing for bankruptcy to propose a resolution professional as she has to scrutinise the affairs of the company and trace voidable transactions. “Thus, it may be appropriate to appoint an independent person as the insolvency resolution professional to prevent misuse of this provision,” the ministry said.
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