The Insolvency and Bankruptcy Board of India (IBBI) has made significant amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and IBBI (Liquidation Process) Regulations, 2016 to strengthen the regulatory framework of the liquidation process. These changes aim to facilitate a smoother process for liquidation, ensuring accountability and bolstering the confidence of stakeholders in the liquidation process.
Separate bank accounts for each real estate project
IBBI has said that to ensure financial transparency and accountability, the amendment makes it mandatory to have a separate bank account for each real estate project under a corporate debtor.
Siddharth Mody, Partner at J. Sagar Associates (JSA) said, “Separate bank accounts for each real estate project will ensure financial transparency and accountability in project management, reducing the risk of fund mismanagement and protecting investments of the home buyers.”
From a debtor’s perspective, Mody said that separate bank accounts will promote disciplined financial management and could assist in maintaining project-specific financial clarity, aiding in the resolution process.
However, experts also mentioned that the project-wise corporate insolvency resolution process (CIRP) was legally recognised earlier but the recent the recent amendments will streamline the process and the procedure robust.
“These amendments also provide enabling provision for Resolution Professional (RP) and Committee of Creditors (CoC) to invite resolution plans separately for a real estate project or group of real estate projects of the corporate debtor. While the concept of project-wise corporate insolvency resolution process (CIRP) was jurisprudentially recognised before, these recent amendments provide regulatory mechanisms for smooth implementation of the same,” said Shivani Sinha, Partner, Luthra and Luthra Law Offices India.
Approval of committee for insolvency resolution process costs
IBBI has said that intending to enhance the oversight of the Committee of Creditors (CoC) over going concern costs, the amendment provides that the Resolution Professional (RP) seek approval from the CoC for all costs including going concern costs related to the insolvency resolution process.
In the case of the Committee of Creditors of Essar Steel India Vs. Satish Kumar Gupta and Others, the Supreme Court on 15 November 2019 affirmed the Committee of Creditors' (CoC) discretion to decide on the rehabilitation or liquidation of the corporate debtor (CD), highlighting the CoC's central role in guiding the corporate insolvency resolution process (CIRP).
The Insolvency and Bankruptcy Code (IBC), 2016 and IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, acknowledge the necessity of maintaining a CD as a 'going concern' for preserving its value and ensuring better creditor returns. This includes mandating resolution professionals (RP) to obtain CoC approval for all insolvency resolution process costs, including operational costs to maintain the CD as a going concern, thereby emphasising the importance of CoC oversight in financial matters during CIRP.
“Approval of committee for insolvency resolution process costs will provide an oversight mechanism on the costs incurred during the process, ensuring they are justified and transparent, potentially leading to higher recoveries for creditors, including homebuyers,” said Mody.
Disclosure of fair value in the information memorandum and valuation methodology
The amendment allows fair value to be included in the Information Memorandum (IM) issued by the RP to attract more participation in the resolution process. IBBI has said that for informed participation in the process, the fair value may be made part of the information memorandum (IM). However, the CoC, after recording the reasons, can decide not to share such a piece of information where it is considered view such a disclosure is not beneficial for the resolution.
Mukesh Chand, Senior Counsel, Economic Laws Practice said, “It is seen that in most resolution plans, the value offered revolves around liquidation value even though it is not supposed to be revealed. Therefore, with a view to attracting more participation in the process, the amendment provides that the fair value may be made part of the Information Memorandum issued by RP for inviting expression of interest.”
Previous CIRP Regulations require that valuation reports, including fair value and liquidation value, are shared with the CoC only after resolution plans are received. This timing limits the CoC's understanding and ability to make informed decisions on eligibility criteria and evaluation matrices, relying on incomplete information.
To increase transparency and reduce disputes over valuation-related issues, the IBBI has amended the provision and has mandated explaining the valuation methodology to the members of the CoC before the computation of estimates.
“Post-disclosure disputes over valuation methods among CoC members could be minimised by having valuers discuss their methodology with the CoC before finalising their reports. The requirement of explaining valuation methodology will promote transparency and build trust among homebuyers regarding the fairness of proceedings. Disclosure of valuation reports will ensure that homebuyers are aware of the financial standing and potential of the real estate projects,” Mody said regarding valuation methodology.
Monitoring committee for implementation of resolution plan
The amendment enables the CoC to decide for constitution of a monitoring committee for overseeing the implementation of the resolution plan.
“So far the code only provided for supervision mechanism for implementation of resolution plans and the specific reference to the Monitoring committee was missing, now
CoC can decide on the constitution of a monitoring committee for overseeing the implementation of the resolution plan,” said Chand from Economic Laws Practice.
The committee may include the RP, any other insolvency professional or any other person as its member. In case the RP is made part of the committee, the monthly fee payable to him shall not exceed the monthly fee received by him during the corporate insolvency resolution process.
“A dedicated body overseeing the resolution plan's implementation can safeguard homebuyers' interests, ensuring the effective execution of commitments made in the plan,” said Mody from JSA.
Liquidators reducing the reserve price
The liquidator may reduce the reserve price by up to 25 per cent for assets with an existing valuation of the CIRP on one occasion with the approval of the Stakeholders’ Consultation Committee (SCC) at any time during the process. For assets where fresh valuation is conducted during liquidation, the reserve price can be reduced by up to 10 per cent in subsequent auctions with SCC's approval. Prior to applying for early dissolution, the liquidator must seek the SCC's views and recommendations, providing a detailed report in the application to the Adjudicating Authority (AA).
“The objective is to give more say to the SCC in management of litigation process, as under the law the opinion of the SCC is not binding on liquidator, so IBBI is bringing such changes by way of regulations,” said Chand.
IBBI has said in the release that wherever the corporate debtor has given possession to an allottee in a real estate project, such asset shall not form a part of the liquidation estate of the corporate debtor.
Chand further added, “It is also clarified that where the corporate debtor has given possession to an allottee in a real estate project, such asset shall not form a part of the liquidation estate of the corporate debtor. This is done to clarify any confusion about the assets of the company. Further to bring checks and balances on the functioning of liquidators.”