Bankruptcy Regulator Has A Four-Point Plan To Tackle Delays

Section 9 of the code allows 14 days for admission or rejection of an application initiating insolvency proceedings. One of the main reasons for the delay in admitting an application is the requirement to verify the existence of the debt and default.

In 2020-21, the average time taken to admit an operational debt was 468 days. In 2021-22, it rose to 650 days.

IBC lays down the record and evidence that an operational creditor must submit along with the insolvency application. This includes a copy of the invoice demanding payment or demand notice affidavit stating no existing dispute vis-à-vis the debt, copy of certificate from the financial institution, record with information utility or any other proof confirming there's no payment of unpaid debt.

Now, the IBBI is proposing Goods and Services Tax returns to be enough evidence to show default for registered operational creditors. Forms GSTR-1 and 3B, along with the e-way bill, IBBI says, can serve as proof to establish that the supply of goods or services to the corporate debtor has actually happened.

Resolution professionals are required to collect all information regarding the financial details of a corporate debtor. This forms the basis for the information memorandum, which is shared with prospective resolution applicants.

Under IBC, promoters are required to assist resolution professionals. But, many a time, resolution professionals don't get adequate information to prepare a comprehensive information memorandum, leading to hiccups in the insolvency process, the regulator notes.

And so, the regulator has suggested:

• To mandate the creditors' committee provide all the relevant information they possess in terms of the assets of the company.

• The information would include valuation exercises or stock audits, the relevant extracts from the transaction, or forensic audits.

• To equip the insolvency resolution professional/resolution professional to seek relevant information from the promoters of the corporate debtor, employees, partners and others, and to place an obligation on them to share all the information that is sought by the IRP/RP in a timely manner.

As of Feb. 28, 2022, 708 applications on avoidance transactions valued at around Rs 2 lakh crore have been filed before insolvency tribunals. And, most remain pending.

The RPs or the liquidator are required to file avoidance applications if it is found that the business of the company was being carried with an intent to defraud the creditors or for any fraudulent purpose.

But it's not always possible for the National Company Law Tribunal to dispose of these applications during the insolvency or the liquidation process.

So, the recommendation is to provide information on how avoidance applications and related proceedings would be pursued.

A resolution professional is required to appoint two registered valuers to determine the fair value and the liquidation value of a corporate debtor. The valuation exercise is crucial for decision-making by the Committee of Creditors.

But there are no notified standards in India for valuation and so, registered valuers tend to use different standards, which may lead to a difference in approach and methodologies adopted for valuation, the regulator points out.

So, a third valuer may be appointed to avoid lengthy litigation, the IBBI suggests. It recommends a threshold of 25% difference for appointing a third valuer.