Will the upcoming Budget make reforms to the Insolvency and Bankruptcy Code, 2016?

This being the last full budget to be presented by this Government before the general elections in 2024, there are number of political, economic, and social factors at work that may have an impact on the Union Budget 2023-24. This budget also comes at a time when the global economy is witnessing a slowdown and is on the verge of recession; however, the outlook for the Indian economy remains largely positive, with IMF and World Bank describing India as a bright spot in the global economy.

Amongst several important decisions in this Budget session, the government is expected to consider amending the Insolvency and Bankruptcy Code (IBC/Code) in response to calls from stakeholders. The key expected amendments could be a swift and quick admission of Corporate Insolvency Resolution Process (CIRP) applications, streamlining of the IBC process, recasting of the liquidation process, the role of service providers and other stakeholders could be more clearly defined, and a laying down the framework w.r.t. cross-border insolvency, et al.

It is expected that the government might consider proposing an amendment to the Pre-Packaged Insolvency Resolution Process (PPRIP) by enlarging its framework to a broader range of Corporate Debtors in addition to MSMEs. This amendment will provide quicker, cost-effective and value maximising outcomes for all the stakeholders and will also protect the continuity of businesses.

Another significant amendment in the Code might come for the insolvency cases relating to real estate developers. That after examining the try-outs by the Judicial Authorities to adapt the CIRPs nature to the real estate sector by considering the effective reverse CIRP and project wise resolution, the Government is expected to propose a separate mechanism for resolving insolvency in the real estate sector, where specific projects that have defaulted can be considered distinct from the larger entity for resolution purposes. Here, it is recommended that the Government should also consider introducing an amendment in the Code where the promoter of the real estate company should be given an opportunity to infuse capital from outside in the defaulting project and propose a robust plan before the AA to complete the project in a time bound manner before admitting the CIRP in relation to the specific project or project(s) under the said real estate developer. This amendment would be a win-win solution for all the stakeholders including the real estate allottees whose main object is to get the possession of their flats.
Pursuant to the notification of the Union Government dated 15.11.2019 where it notified Insolvency and Bankruptcy (Application to Adjudicatory Authority for Insolvency Resolution Process for Personal Guarantee to Corporate Debtors) Rules, 2019, the creditors were permitted to file claims against personal guarantors of the Corporate Debtor before the NCLT under part II of the IBC and before the DRT (Debt Recovery Tribunal), under Part III of the IBC. It is expected that the Government should consider some amendments in provisions relating to Personal Guarantor especially w.r.t appointing of the Interim Resolution Professional immediately on filing of an Application under Section 95 of the Code by the Financial Creditor without giving an opportunity to the Personal Guarantor to represent the case.

We all are aware that Financial Institutions in a most mechanical manner get the Guarantees executed at time of granting loans especially w.r.t Personal Guarantees to be taken most of the time from Directors without even verifying their Net Worth. But later expects from those individuals to pay when the Borrower/Corporate Debtor defaults. Furthermore, there lies one more problem which is too early to explain by way of example, but permitting the Financial Creditors to go against Personal Guarantor/Corporate Guarantor is actually diluting the objective of I&B Code 2016 as CoC in such cases of Corporate Debtor where they have the Personal Guarantors/Corporate Guarantors available to file application under I&B Code 2016 to permit any Resolution Plan in haste just to recover their dues which is not actually the objective of the I&B Code 2016. So, its high time that some amendments be made to overcome such situations.

Another proposed amendment in IBC could be in concern with the protection of successful resolution applicants (SRA) after the implementation of the resolution plan. The provisions of IBC though provide for the clean-state theory pursuant to the approval of the resolution plan by AA, however, in a practical scenario, it is observed that the statutory authorities either continue proceedings concerning claims covered by the resolution plan or initiate fresh proceedings for the past claims which hinder the successful implementation of the resolution plan, takeover of CD by the SRA and is against the objective of the Code. Even there are divergent views among the Judiciary in this regard and same Hon’ble NCLAT, but different benches have in past given different verdicts on the issue. Thus, it is expected that the Government may propose an amendment where it should be clarified that all claims post approval of the resolution plan by AA stands extinguished and no proceedings may be commenced or be continued by the government authorities w.r.t. the claims arising before the commencement of CIRP, unless otherwise provided for in the resolution plan.Similarly, it is expected that some amendments be made that I&B Code 2016 should not be used as Recovery Mechanism especially in case of Operational creditors and in few cases of Financial Creditors also where the Solvent Corporate Debtor is dragged into CIRP.

As time is of the essence in the insolvency resolution process, therefore the government in the budget session 2023 may take proactive measures to close the gaps and eliminate the inconsistency in the legislation. This will surely give CD faster and more effective ways to recover, and it will encourage the SRA to work with them to turn around their financial situation.

Chawla is Managing Partner, S&A Law Offices and Kapoor is Principal Associate, S&A Law Offices.

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