Is The Government's Latest Attempt To Revive Insolvency Law Any Good?

(Source: Unsplash)

A "project wise"' resolution may soon be a reality for real estate insolvencies. The National Company Law Tribunals will have the discretion to admit insolvency against the project in default, rather than the corporate entity as a whole, according to the latest proposals by the Ministry of Corporate Affairs.

The real estate project would be viewed as separate from the larger entity for the limited purpose of resolution, the proposal said. It's been prompted by the fact that other solvent real estate projects get stalled once an insolvency process is initiated against the company, affecting the right of homeowners.

The proposal—although beneficial—may not be practical, according to Aparna Ravi, partner at Samvad Partners. The proposal to limit insolvency to specific real estate projects that have defaulted, rather than the entire company, would be useful and particularly serve to protect home buyers of solvent projects. But the mechanics of this will need to be worked out, she said.

Most real estate companies operate through special purpose vehicles where the assets and funds are earmarked for specific projects. But if this is not the case or there are any common assets, it could result in ambiguity regarding the extent of the insolvency estate.

Aparna Ravi, Partner, Samvad Partners

L Viswanathan, partner at Cyril Amarchand Mangaldas also took a similar stand.

According to him, while the separation of real estate projects for purpose of IBC resolution is well-intended, a proper legal mechanism can and must be formulated for implementation.

"This will enable finding solutions for projects that can be solved and isolate projects that are likely to contaminate the entire company."

Besides catering to the special requirements of the real estate sector, several other changes intended at revamping the Insolvency and Bankruptcy Code are part of the MCA proposals.

Proposed Time-Saving Measures

The Ministry has proposed several changes intended at making the implementation of the code time-effective.

First, the determination of default, according to the proposals, would be done at the Information Utility level, so as to save the time spent in insolvency court in determining the same.

However, this could pose challenges for operational creditors, according to Karishma Dodeja, partner at Trilegal.

Operational creditors would have to authenticate their claims with Information Utilities, in order to initiate insolvency proceedings. Until and unless a behavioural change is brought about, in terms of them regularly submitting information in respect of their claims, the provisions could cause serious difficulties to operational creditors in initiating a corporate insolvency process.

Karishma Dodeja, Partner, Trilegal

Second, the proposal is to reduce the time available for admission of insolvency application to 14 days. Earlier, this time period was available for determination of default.

Third, to reduce time spent on litigation, the proposal is to segregate the resolution plan stage from the process of distribution of bid amount among creditors. Most disputes revolve around the distribution of funds obtained from the successful bidder, the Ministry noted.

"Since no plan can move forward unless all these disputes are settled, a significant time is lost within which the bidder could have taken over the management of the insolvent company. This results in value deterioration."

Finally, there's a proposal to avoid duplication of activities during resolution and liquidation stage. Several processes such as ‘calling for claims' are done afresh as part of the liquidation.

The proposal is to allow the Insolvency and Bankruptcy Board of India to provide for a mechanism in which this redundancy can be avoided and the data collated during the insolvency process could be reused.

Proposal To Ensure Fairness

To ensure fairness in the process, the Ministry has proposed changes to the distribution waterfall where all unsecured creditors will be dealt with fairly and equitably. All unsecured creditors, except workmen and employees, will need to be treated equally on the occasion of distribution of funds. The move—although positive—raises several concerns, according to Dodeja.

The proposal, in terms of recognising that creditors at least deserve the liquidation value of their claims, is in alignment with international insolvency practices. However, it has failed to recognize that there could be priority/ranking in terms of security underlying financing. This is detrimental to the interest of financial creditors.

Karishma Dodeja,Partner, Trilegal

More Power To Creditors

The Ministry's proposal is to allow creditors to approve more than one resolution plan as finding one resolution applicant, who is willing to take over the entire entity, is difficult at times.

Currently, the law doesn't allow for more than one resolution plan. This significantly improves flexibility of the process, according to Ravi.

This is quite a useful proposal. It would permit an insolvent company to have more than one resolution applicant for different assets/divisions of the company and allow for value maximisation.

Aparna Ravi, Partner, Samvad Partners

This will enhance the flexibility in the insolvency process, she said. Comments for the consultation paper are invited. Responses can be submitted till Feb. 7.