Insolvency and Bankruptcy

MCA Invites Public Comments for Changes Being Considered In IBC

MCA Invites Public Comments for Changes Being Considered In IBC

On January 18, 2023, the Ministry of Corporate Affairs (MCA), issued a notification inviting comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016 regarding the use of technology in the ecosystem of IBC. Admission of CIRP applications, streamlining the insolvency resolution process, recasting the liquidation process, and the role of service providers under the Code. The present article shall discuss the changes in respect of using technology in the ecosystem of IBC and admission of CIRP proceedings.

Using Technology in the Ecosystem of IBC 

  • The MCA, AA, IBBI IUs and service providers are considered the pillars of the Code and operate on different technological platforms. However, there were certain challenges in the fragmented nature of their approach, and it is believed that streamlining their interactions can result in enhanced transparency and minimum delays, thereby facilitating more effective decision-making. 
  • Thus, there is a need for developing a state-of-the-art electronic platform that shall be able to handle several processes under IBC with minimum human interface. 
  • The MCA is considering that this e-platform can provide a case management system, automated processes for filling applications with the AAs, delivery of notices, allowing interaction of IPs with stakeholders, storing of records of CDs undergoing the process, and providing incentives for participation of other market players in the ecosystem of IBC. It may also enable regulators and the AAs towards exercising better oversight over their respective domains of functioning with the help of consolidated information available on the e-platform.           

Admission of CIRP Applications

The changes regarding the admission of CIRP Applications are listed below –

Increased Reliance on the record submitted with the IUs during the Admission Process

  • The Code adopts a criteria known as the default test to determine whether an application is fit to be admitted for the initiation of CIRP wherein the AA checks if the Corporate Debtor (CD) has failed to make the payment of the requisite debt and, upon being satisfied with the same the AA used to admit the application. 
  • It has been observed by the Authority that determining the occurrence of such a default is a time-consuming process due to the time taken for the production of evidence, contesting arguments of the necessary parties in the event of the occurrence of a default, or subsistence of a dispute if an application is filed by an operational creditor, and requesting for consideration of extraneous factors.
  • There can be a significant reduction in the time consumed for such a process only if the relevant material is being placed before the AA, and it is only the determination of the occurrence of a default or the presence of a genuine dispute regarding it that is required. 
  • Therefore, it is being considered by the Authority that the FCs, OCs or CDs may ascertain the relevant information with regard to the occurrence of default at the IU before filing an application for the initiation of CIRP proceedings.
  • The person intending to initiate the CIRP Proceedings must produce to the AA the relevant information available with the UI, which can be relied on by the AA for speedy default verification and swift initiation of the CIRP. 
  • For effectuating this proposal, the following changes are being considered to the provisions of the Code:
  • Section 215(2) mandates the FC to submit the relevant financial information to the UIs irrespective of its intention to initiate the CIRP so that when there is an occurrence of any default, the AA can confirm the same from the information so supplied by the FCs to the UIs. 
  • It is worth noting that the above-mentioned provision is a mandate for the FCs but discretion for the OCs. Therefore it is being considered by the MCA to make it mandatory for even the OCs to provide the relevant financial information with the UI, but only if it intends to initiate the CIRP. 
  • Upon the submission of the relevant information to the UI u/s 215, there isn’t any need for the CD to respond to the information submitted, as section 214 obligates just the parties to authenticate the information.
  • For the purpose of effectuating the abovementioned proposal, it is essential to ensure that the information submitted to the UIs is valid and the same is confirmed by the CD. 
  • As a consequence of the same, it is being considered that section 215 of the Code must be amended to provide a reasonable opportunity for the CD to access the financial information, which shall be considered authenticated if the CD or the debtor doesn’t respond within a stipulated period in order to avoid any delays at this stage. 
  • Currently, section 7 states that other evidence in addition to the record of the default available with the IUs can also be furnished to establish the occurrence of a default, and once such changes are implemented, the financial information in relation to the default will be accumulated by the IUs, along with being verified by the CD before anyone files an application for the initiation of CIRP. 
  • Accordingly, the AA can place reliance on the record of the default present with the IUs for satisfaction about the occurrence of a default, and an evaluation of any other evidence won’t be a requirement anymore. 
  • Therefore, it is being considered that there shall be an amendment in the Code to provide that during the consideration of any application filed u/s 7 and 9, the AA will solely rely on the record of the default available with the IUs for determining the occurrence of default. 
  • Further, to strengthen the sanctity of the same, it is also being considered that such a record shall be conclusive proof of the occurrence of a default.   
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Admission of Application to Be Mandatory Upon the Occurrence of Default Being Established

  • Section 7 of the Code deals with the application filed by the financial creditor for initiating CIRP against a corporate debtor. Under Section 7(5), upon the AA being satisfied with the commission of default by the CD along with the fulfilment of the other procedural requirements, he must admit the application and initiate the CIRP.
  • As per this section, the scope of the AA’s power is limited to the determination without him requiring to consider other factors or circumstances relating to the CD’s inability towards the repayment the debt, and the legislative intent behind the same was also clarified in the Notes on Clauses to Clause 7 of the IBC Bill, 2015, at the time of its original introduction in the Parliament. 
  • The interpretation with regard to the usage word “may” in sec-7 (5) was also made in the Apex Court’s judgement titled Vidarbha Industries Power Limited vs Axis Bank Limited, wherein it was held that the same is done for indicating the AA’s discretion in respect of admission or rejection of the application despite the presence of default. 
  • Consequently, there has been an observation that the AAs are involved in detailed factors regarding the solvency and financial health of the CD, which isn’t needed according to the original intent of the law, resulting in confusion in the market regarding the scope of AAs discretion at the admission stage. 
  • To alleviate any doubts in this regard, the MCA has proposed that section 7 may be amended to provide clarification with respect to considering an application initiating CIRP by the financial creditors. The AA is only needed to be satisfied with the occurrence of default as well as the fulfilment of procedural requirements, especially for this purpose (and nothing more). Upon the establishment of a default, admitting the application and initiating the CIRP shall be mandatory for the AA. 
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Restriction on the Promoter’s Right to Propose an IRP

  • As per section 10 of the Code, the corporate debtor is vested with the power of  voluntarily initiating the CIRP upon the occurrence of default as well as proposing for the appointment of an insolvency professional IP to be appointed as IRP subsequent to the admission of the case. However, it is felt that appointing the IRP as per the recommendation of the CD can be incongruous for a person as the IRP needs to instil trust and confidence in the COC. 
  • She has the responsibility of accumulating relevant information from the CD, followed by scrutinising its affairs to track avoidable transactions or transactions that amount to fraudulent or wrongful trading. 
  • Thus, it may be correct to appoint an independent person as the IRP to prevent the misuse of this provision. It is being considered that an amendment be made in section 10 to delete the CD’s right for proposing an IRP. In such instances, the IRP shall be appointed by the AA on IBBI’s recommendation. 

Empowering the AA for the Imposition of Penalties for Violations of the Code

  • Section 235A deals with punishments to be imposed for non-compliance with the provisions, rules or regulations framed under the Code, for which there isn’t a specific penalty under the same.
  • The punishment under this provision is monitored by the Special Court, made under Chapter XXVIII of the Companies Act, 2013, through criminal proceedings. In lieu of the Central Government’s policy regarding the decriminalization of offences in business law statutes wherever feasible, it is felt to convert section 235A into a civil liability.
  • Therefore, it is being considered that Sec 235A may be amended to empower the AA for the imposition of penalties due to a person’s failure towards compliance with the provisions or any rules or regulations made under the Code where such compliance was required. The proceedings in respect of the same may be initiated through an application made by the IBBI or any other person authorized by it for this purpose. 
  • Since the Adjudicating Authority, i.e. the NCLT or DRT, oversee the conduct of the various processes under the Code, depending upon the case, they may be better equipped for determining the penalties if any contravention is found. 
  • The MCA[1] has also observed that the proceedings are initiated maliciously for the purpose of delaying the conduct of the process and with no reasonable probability of success or based on insufficient evidence submitted without the objective of determining the actual issue, thereby consuming a substantial amount of time of the AA, which can otherwise be utilised for other matters, that consequently drain the resources for the concerned parties and cause delays in carrying out the insolvency resolution processes under IBC.
  • Therefore, it is being considered that IBC must consist of a mechanism for discouraging the initiation of such proceedings. Section 65 of the Code enumerates a penalty against fraudulently or maliciously initiating the admission proceedings. However, no such penalty is imposed on other proceedings filed before the Adjudicating Authority. Another consideration is to empower the AA to impose such penalties upon the persons filing vexatious or frivolous CIRP applications.
  • In addition to this, the MCA felt that the quantum of the penalty to be imposed for the contraventions must be linked to the loss caused by any person or the unlawful gain earned by the concerned person responsible for such contravention due to the collective nature of proceedings undertaken under IBC and the interdependence of interests of different stakeholders.
  • Therefore, the minimum penalty that the AA can be imposed by the AA for the contraventions mentioned above shouldn’t be less than Rs. 1, 00,000 / day, extending to three times the loss caused or unlawful gain, whichever is higher.
  • Due to the non-identification of the precise type of contravention under the kind of wrongs, linking the penalty to the loss incurred or unlawful gain made will make sure that the consequence of the contravention determines the extent of penalty that may be imposed by the AA. In lieu of this, the AA may determine an appropriate penalty within the prescribed range on the basis of the gravity of the contravention.
  • To ensure compliance with the obligations of the promoters of the corporate debtors comply under IBC and to deter them from repeated or substantial commission of contraventions, It is being considered that there should be an amendment in section 29A of the Code to empower the AA for barring such a promoter from applying for resolution and submitting a resolution plan in the CIRP of any CD. The AA, while exercising this power, must note the conduct of the promoter in the relevant CIRP and the gravity of the contraventions so committed.
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Suggestions/comments, if any, along with brief justification, may be submitted online therein at the prescribed manner by 5:30 PM on 07.02.2023The changes being considered with regard to the usage of technology and the admission of applications can significantly contribute to the better development of the Code and streamlined CIRP proceedings. The subsequent blogs shall deal with the other changes under consideration. 

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