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Union Budget 2022: proposed amendments to the Insolvency and Bankruptcy Code

posted 2 years ago

Following the finance minister’s speech proposing the Union Budget 2022, Parliament is likely to consider further amendments to the Insolvency and Bankruptcy Code 2016 (IBC) in 2022.

What is likely to be proposed?

The finance minister’s speech followed two notices inviting public comments, that the government released at the end of 2021. Together, these suggest that the government is considering:

  • rolling out a cross-border insolvency framework, modelled on the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (the Model Law);
  • mandating that banks and financial institutions generally only rely on records with the information utility (registered with the Insolvency and Bankruptcy Board of India) to demonstrate the default of a corporate debtor, and that national company law tribunals (NCLTs) consider this sufficient evidence to commence a corporate insolvency resolution process (CIRP), which will reduce the time taken in admission of CIRPs;
  • streamlining the provisions relating to improper trading and avoidable transactions by explicitly providing that proceedings against improper trading and avoidable transactions can continue even after approval of a resolution plan, by making changes to the look-back period, and by correcting various drafting discrepancies in the IBC;
  • providing a 30-day fixed time period to NCLTs for approval or rejection of resolution plans; and
  • allowing an out-of-court closure of a voluntary liquidation process prior to dissolution, in the same manner in which a voluntary liquidation process is commenced. This will be supported by the establishment of the Centre for Processing Accelerated Corporate Exit, to facilitate quicker voluntary liquidation.

What is the likely impact of these proposals?

The government’s proposals relating to avoidance or improper trading actions and allowing out-of-court closure of a voluntary liquidation process will enable swifter closures of voluntary liquidation processes and will strengthen the provisions relating to avoidance or improper trading actions. This will provide much-needed legal clarity for all stakeholders.

Similarly, the government’s proposal to adopt the Model Law will provide certainty and clarity regarding cross-border issues (which have previously arisen and been dealt with in an ad hoc manner in cases such as Jet Airways). The government will do this by putting forth a framework that facilitates:

  • access to and participation of foreign representatives;
  • recognition of and grant of reliefs to foreign proceedings; and
  • cooperation and coordination between Indian stakeholders and their foreign counterparts.

However, while adopting the Model Law, the government should consider resolving various issues that may make it difficult to implement the law. For example, the definition of “foreign proceedings” requires that “reorganisation” proceedings have the same meaning as “resolution” under the IBC. Since resolution requires the rescue of the company as a whole, this may exclude various “business sale-style” proceedings from being recognised. Moreover, the government is proposing to extend the application of the IBC to companies not incorporated in India but having a physical office, so that they can undergo the CIRP and liquidation. However, various features of these procedures may need to be altered when they are applied to foreign incorporated companies, particularly whose “centre of main interests” lies outside India. In such cases it may not be feasible to seek resolution plans for the whole company under the IBC, or require entry into liquidation only after failure of the CIRP where the rest of the company has been put into liquidation abroad. Modifications to these important features of the CIRP and liquidation process should be considered and consulted on before the IBC is made applicable to such entities.

Finally, amendments relating to shortening timelines for admission of a CIRP and approval of a resolution plan indicate that the government is cognisant of the “timeliness” problem that has arisen in the IBC. However, this issue is unlikely to be resolved by legislative amendments, which the government has seen fail many times in the past. The government should, therefore, work with NCLTs to increase the number of judges and build capacity for swifter disposal of cases, instead of attempting to address this issue legislatively.

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