Withdrawal of CIRP: Withdrawal is now permitted only through the resolution professional with 90% approval of the Committee of Creditors (“CoC”) and is not allowed before the CoC’s constitution or after the first invitation for resolution plans. The Adjudicating Authority must decide within 30 days, recording reasons for any delay.

Restoration of CIRP: A significant new provision allows a onetime restoration of the CIRP where no resolution plan has been received within the maximum period, or where a plan is rejected. This requires 66% CoC approval and is subject to a maximum period of 120 days for the restored process.

Resolution Plans: Several measures such as the following streamline the approval and implementation process:

• The Bill introduces a two-stage approval framework, enabling the Adjudicating Authority to first approve the implementation of a resolution plan and thereafter approve the manner of distribution within 30 days. This de-links distribution from implementation to prevent inter-creditor disputes from delaying resolution
• The CoC is given an opportunity to rectify defects in the resolution plan before rejection by the Adjudicating Authority.
• The definition of ‘resolution plan’ has been expanded to expressly permit sale of one or more assets of the corporate debtor through one or more plans proposed by one or more resolution applicants, subject to conditions specified by the IBBI. This aligns with the IBBI’s earlier idea to enable assetwise resolution under IBC.

Codification of the Clean Slate Principle: The Bill codifies the clean slate or fresh slate principle, which had been propounded by the Hon’ble Supreme Court in Essar Steel and subsequently upheld in a catena of judgments such as Ghanshyam Mishra.

Dissenting Financial Creditors: The minimum legal entitlement of a dissenting financial creditor has been revised to be the lower of: (i) the amount payable to such creditor in the event of liquidation of the corporate debtor under Section 53 of the Code; or (ii) the amount that would have been payable had the resolution plan proceeds been distributed in accordance with the Section 53 waterfall.

Clarification on government dues: By expressly stipulating that a security interest cannot merely arise by operation of law, the Bill deprioritises statutory dues in the waterfall mechanism under Section 53. This is intended to clarify the status of government dues in light of the Hon’ble Supreme Court’s judgment in Rainbow Papers Limited.

Clarification on secured creditor’s rights and inter-creditor priorities: The Bill clarifies that the secured creditor shall be considered secured only to the extent of the value of its security interest and inter-se agreement prescribing priorities amongst the secured creditors would not be disregarded under Section 53 waterfall. This lays to rest the questions that have presently been referred to a larger bench of the Hon’ble Supreme Court in Ruchi Soya.

Avoidance Transactions: The look-back period for preferential, undervalued and extortionate credit transactions has been extended and now runs back (one or two year, as applicable) from initiation date (i.e. the date of filing the insolvency initiation application, rather than admission) to the insolvency commencement date, capturing transactions during the period the initiation application remains pending. The Bill also extends the reach of Section 49 to the assets of the related parties of the Corporate Debtor.

Transfer of Guarantor Assets: A new Section 28A enables the transfer of assets of personal or corporate guarantors as part of the CIRP of the principal debtor, subject to the relevant creditor having taken possession in accordance with applicable law and CoC approval. Where the corporate guarantor is itself undergoing insolvency, the sale requires approval of the CoC of the corporate guarantor as well, with proceeds going to the guarantor’s estate.

CoC’s role during liquidation and omission of duplicative exercises: The Bill provides for the CoC being the supervisory body during liquidation with voting rights, marking a radical shift by way of checks on liquidator’s powers akin to a resolution professional during CIRP. Further, the Bill omits certain duplicative exercises such as collation, verification, and adjudication of claims, with the resolution professional now having enhanced powers to determine value of claims during CIRP.

RP cannot be appointed as liquidator: The Bill provides that a resolution professional in a CIRP cannot be appointed or replaced as liquidator in the liquidation of the same corporate debtor. The appointment of liquidator by Adjudicating Authority shall be based on IBBI’s recommendation and the liquidator can be replaced by CoC with 66% voting share.

Dissolution after CIRP: The Bill allows the Adjudicating Authority, on application of the CoC with 66% voting share, to directly order dissolution of the corporate debtor after a failed CIRP.

Timeline for disposal of NCLAT Appeals: The Bill provides that NCLAT must dispose appeals within 3 months of their receipt.

No interim moratorium during personal insolvency: The Bill amends Section 96 to exclude personal guarantors from the benefit of interim moratorium.

Penalty for frivolous proceedings and decriminalization of certain offences: The Bill provides for imposition of penalties upon any person who initiates vexatious or frivolous proceedings before the Adjudicating Authority. Further, the Bill omits Sections 74 and 76 (criminal penalties for contravention of moratorium/resolution plan and non-disclosure by creditors) and substitutes them with civil penalty under new Sections 67B and 67C of the Code.

Structural Reforms

Creditor-Initiated Insolvency Resolution Process (“CIIRP”)

The Bill introduces a new out-of-court CIIRP under Chapter IV-A. The CIIRP seeks to not only reduce the burden on NCLTs, but also lower costs of resolution and preserves value by enabling early intervention. The key features are as follows:

• CIIRP is available for corporate debtors belonging to notified categories (by asset size, income, class of creditors, or amount of debt).
• A class of financial creditors may appoint a resolution professional (with 51% approval) to initiate the process after giving the corporate debtor 30 days to respond. Another approval is required after receipt of representation from the corporate debtor.
• The management continues to vest with the board, supervised by the resolution professional who attends all board, shareholder, and committee meetings and may reject any resolution.
• There is no automatic moratorium (which needs to be applied for before the Adjudicating Authority with COC approval)
• The process must be completed within 150 days, extendable by 45 days with 66% CoC approval.
• Failure to receive a resolution plan, non-cooperation by the corporate debtor, or a CoC decision to initiate CIRP, shall result in conversion of CIIRP to CIRP.

Group Insolvency: The Bill introduces a framework vide Section 59A, empowering the Central Government to frame rules for coordinated insolvency proceedings for two or more corporate debtors forming part of a group. Rules may provide for a common bench of Adjudicating Authority, coordination between CoCs and insolvency professionals, a common professional, a joint CoC, and binding coordination agreements. This is an enabling provision for procedural coordination, not substantive consolidation of group insolvency proceedings. This will reduce the ad hocism in practice due to reliance on judicial discretion for commercial solutions in cases of group insolvency, which made the group insolvency regime uncertain and unpredictable and led to inconsistent outcomes.

Cross-Border Insolvency: The Bill introduces Section 240C which empowers the Central Government to prescribe rules for administering and conducting cross-border insolvency proceedings, including recognition of proceedings, judicial cooperation, assistance and coordination.

Conclusion

The Bill reflects a maturing insolvency regime, one that is increasingly responsive to market realities and global best practices. The changes in the Bill are both corrective and structural. Firstly, recognizing the need for periodic updates to an economic legislation like the Code, several amendments are proposed to rectify the inefficiencies plaguing the current insolvency processes – such as explanations/clarifications to certain provisions with a view to clarify the original intent of the legislature and correct interpretive aberrations. Secondly, taking cue from global legislative developments and best practices, the Bill introduces some new frameworks, including for hybrid restructuring process under CIIRP as well as cross-border and group insolvency framework, thereby plugging the deficiencies in the Code. While the former ensures that the current frameworks are streamlined to reduce delays, maximize value, and improve governance, the latter paves the way for a structural shift in the restructuring avenues available to the stakeholders. If implemented effectively, including through the rules and regulations to be subsequently introduced, the aforesaid reforms could mark the beginning of the Code’s second decade as a more efficient, predictable and consistent insolvency law.

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