Insolvency Law: Three Curious Proposals By The MCA

(Source: Reuters)

In a move that's baffled experts, the Ministry of Corporate Affairs has suggested that a new mechanism be devised under IBC to deal with insolvencies of the corporate debtor and its guarantor together.

To justify the need, the MCA has highlighted situations where assets of the insolvent company and its guarantor—corporate or personal—are so closely or inseparably linked that the meaningful resolution of the company is not viable in a separate proceeding.

For instance, where the building, plant, or machinery belongs to the insolvent company but the guarantor owns the land. In such situations, the ministry has suggested that assets of the personal guarantor be brought in the common pool of assets available for resolution.

Karishma Dodeja, partner at Trilegal, told BQ Prime that this suggestion seems impractical.

There could be a significant difference in the creditor pool of an insolvent entity and its personal guarantor. It would be theoretically impossible to co-mingle their respective assets as part of a common pool. Also, the process of resolution of a corporate entity is different as compared to proceeding against the personal guarantor.

Karishma Dodeja, Partner, Trilegal

According to Aparna Ravi, partner at Samvad Partners, the provision requires further clarification.

It has been very clear so far that the CIRP only relates to the assets of the corporate debtor. The proposal on including the guarantor's assets in the resolution process requires greater clarity on the circumstances where this would be permitted and how the rights of the guarantor's creditors would be protected in such an instance.

Aparna Ravi, Partner, Samvad Partners

The second suggestion is to give secured creditors an option to sell the guarantor's assets, taken over under SARFAESI Act, 2002, via a special window under the IBC. Here again, the emphasis is on those secured assets of the guarantor which are linked to the corporate debtor.

The proposal has been introduced in the light of value maximization struggles that arises due to the commingled nature of the properties of the insolvent company and its personal guarantor, according to Harish Chander, partner at ASA Legal.

Creditors, who have already taken possession of the secured assets under SARFAESI, are often unable to enforce their security interest over the asset as all the proceedings gets stalled during the moratorium that is instituted as a part of the insolvency process. This also prevents the corporate debtor from realizing complete value of their assets, as corporate debtor's assets are essentially linked to that of the guarantor.

Harish Chander, Partner, ASA Legal

By providing the secured creditors an exit opportunity during the process, the corporate debtor would be able to realise better value for their part of the asset, Chander said. He, however, raised concerns as to how the rights of a secured creditor can be ensured under such a process.

Finally, there's a proposal to allow a second chance to first-time unlucky companies.

The MCA has proposed that if an insolvent company ends up in liquidation due to specified reasons, it would be given another chance at revival. These reasons could be if the resolution plan doesn't get implemented as per its terms or gets rejected due to the non-compliance of mandatory pre-conditions for approval of the resolution plan.

In such situations, the creditors' committee will be allowed to ask for the NCLT's approval to restart the insolvency process.

Such a move, however, is counterproductive, according to L Viswanathan, partner at Cyril Amarchand Mangaldas. The concept, although laudable, is unlikely to have any utility, he said.

In concept, it seems laudable that resolution should be given another chance, but in practice, these provisions are unlikely to have any utility as the stage of liquidation is reached only after exhausting all options.

L Viswanathan, Partner, Cyril Amarchand Mangaldas

Dodeja concurred with this opinion.

Insolvency resolution is a time-bound process, she said. "Revival of CIRP post-commencement of liquidation will only lead to further erosion of value of the assets of the distressed entity, which is marginal to begin with generally."