Creditors of insolvent companies may no longer be constrained by the 90-day timeline to submit their claims.
According to the latest proposal by the Insolvency and Bankruptcy Board of India, the window to submit claims could be extended until the invitation of resolution plans. However, this doesn't mean that the regulator has done away with the existing timeline.
The proposal is to merely empower the resolution professional to take decisions on claims filed after 90 days. According to the proposal, the RP may be allowed to take a prima facie decision to either accept or reject a claim and file a consolidated condonation of delay application on behalf of the creditors.
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This would help reduce litigation and the consequent burden on the courts, the regulator has said.
However, legal experts are divided on the proposal's potential to reduce litigation.
According to Siddharth Srivastava, partner at Khaitan and Co., the proposal to file a consolidated condonation application could help reduce the multiplicity of litigation, especially in complex insolvencies involving multiple creditors.
It will contribute towards faster resolution and lessen the RP's responsibility of representing the corporate debtor in multiple matters, thereby reducing CIRP costs.Siddharth Srivastava, Partner, Khaitan and Co.
However, according to Ashwyn Misra, partner at Trilegal, the proposal merely helps in changing the trigger of litigation but not the litigation itself.
Since creditors are free to approach the court if the resolution professional rejects their claim, the proposal merely shifts the point of litigation rather than reduce it.Ashwyn Misra, Partner, Trilegal
It also increases the burden on resolution professionals, as they would not only have to collate the claims, but also file condonation applications on behalf of the creditors.
Instead, the regulator should narrow down the circumstances under which condonation can be granted so that resolution can be completed in a timely manner, Misra said.
Resolution Plans: Creditors' Vote
The second key proposal by the Insolvency and Bankruptcy Board of India pertains to modifying the existing voting system.
According to the existing regulations, the creditors' committee is required to vote simultaneously on all the compliant resolution plans placed before it. The plan that receives the highest affirmative votes, above the 66% threshold, is regarded as approved.
The creditors tend to vote in favour of all available compliant resolution plans to avoid being a dissenting creditor, the IBBI said.
The situation commonly occurs in several real estate cases where the allottees vote in favour of all available plans in order to ensure that they are not dissenting creditors and the insolvency company does not end in liquidation, as liquidation leaves the real estate allottees with no relief. - IBBI
Therefore, the regulator has now suggested a mechanism for creditors to elicit their preferences on these plans. The IBBI has said this could be achieved by a system of voting with preference.
Under the proposed system, when multiple compliant plans come up for consideration, creditors would be allowed to vote on all of them simultaneously. But rather than voting in favour of all plans, creditors can now assign their preference to each plan.
Only first-preference votes would be taken into consideration for approval, and the plan with 66% or more votes would be considered approved. However, if no plan gets the requisite votes, the plan with the least number of votes would be eliminated, and its first preference would be allotted to the second preferred. The process continues until one plan gets sufficient votes.
To illustrate, let's say there are three resolution plans—Plans A, B, and C—before the committee. The creditors may rank each of the plans as 1, 2, or 3 based on their preference. Plan A got three votes, Plan B got six, and Plan C could only get one vote. As no plan meets the threshold, the plan with the fewest votes, Plan C, would be eliminated. Now, let's say the creditor who voted for plan C kept plan B as his second preference; his vote would now go for plan B. This means that plan B, with seven votes, would now be approved as it crosses the threshold.
This is, however, not the best way to deal with the issue of dissenting creditors, according to Misra. "It only complicates the voting process," he said. "Determining the winning bid is much more complicated and confusing under the proposed regulations."
According to Misra, the best way to deal with the situation would be to let dissenting creditors elect whether to receive the liquidation value or the resolution value as per the plan.
However, Ajay Shaw, partner at DSK Legal, said the proposed amendments would make the voting system more transparent and balanced as inter-se preference of financial creditors between the compliant resolution plans would be taken into consideration.
It will ensure that the most preferred plan is selected, Shaw said. "It is imperative that the process is properly conducted so that there is no technical glitch post-approval of the resolution plan."
In other proposals, the regulator has suggested several changes that would codify the responsibility of authorised representatives of financial creditors. IBBI has said there has been a continuous demand by home buyers to increase the duties of the authorised representative to help them understand Committee of Creditors matters and proceedings before insolvency courts. So, the regulator has proposed that authorised representatives assist the members they represent.
This is especially helpful for unsophisticated creditors like home buyers or retail lenders, who depend on the authorised representative's expertise to defend their claim before the CoC, Misra said.
This helps reduce the information arbitrage existing between small lenders and financial creditors.Ashwyn Misra, Partner, Trilegal
The IBBI has also proposed that where the insolvent company's assets exceed Rs 100 crore, there has to be a mandatory audit of insolvency costs.
Comments on the proposals can be submitted until June 27.
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