CURRENT AFFAIRS
CURRENT AFFAIRS
Description
The Insolvency and Bankruptcy Board of India (IBBI) has proposed a new framework aimed at improving the effectiveness of the Corporate Insolvency Resolution Process (CIRP). The proposal addresses issues faced by interconnected corporate entities going through insolvency. The IBBI's discussion paper highlights several inefficiencies and conflicts that arise when multiple related entities undergo CIRP at the same time.
Corporate Insolvency Resolution Process (CIRP)
The Corporate Insolvency Resolution Process is a legal procedure designed to resolve insolvency issues in corporate entities, such as private and public limited companies. A company is deemed insolvent when it is unable to pay its debts. Insolvency can be determined through two main tests:
Cash-flow test - Determines if the company can meet its debts as they become due.
Balance sheet test - Assesses whether the company's liabilities exceed its assets.
Background Of Proposal
The need for this reform became evident through cases like Videocon Industries and SREI Infrastructure Finance. These cases demonstrated that handling interconnected firms separately led to delays and higher costs. IBBI is suggesting a more coordinated approach, which would include joint hearings and appointing a single resolution professional for multiple related companies.
Problems With Current System
Currently, each company undergoing insolvency is treated independently, ignoring their financial interconnections. This results in inefficiencies, increased costs, and weaker recovery outcomes for creditors. High-profile cases, like KSK Mahanadi, which has been ongoing since 2019, underscore the necessity for reforms in this area.
Concurrent Bidding For Faster Asset Sales
Under the current system, asset bids are invited in a sequential manner: first for the entire company and later for individual assets, leading to delays. IBBI proposes allowing both types of bids simultaneously, speeding up the resolution process.
Two-Stage Approval For Resolution Plans
At present, there are delays between the submission and approval of resolution plans by the National Company Law Tribunal (NCLT). IBBI suggests a two-stage process:
First, approve the financial bids and implementation framework.
Afterward, resolve any disputes among creditors.
Improving Interim Finance
Insolvent companies often require funds to continue operations during the resolution process. IBBI proposes allowing interim finance providers to attend meetings as observers, reducing their investment risks while ensuring decision-making remains with the creditors.
Enhancing Value Realization
The proposed changes are aimed at maximizing the value recovery from distressed assets. Allowing interim finance providers to participate as observers in the Committee of Creditors (CoC) is expected to enhance engagement with financiers, improving the overall efficiency of the resolution process.
Public Consultation And Future Directions
IBBI has invited public feedback on the proposed changes, outlined in the discussion paper. The proposals aim to improve the efficiency and transparency of the CIRP and make the submission of resolution plans smoother. Additionally, the amendments are expected to better manage essential services during the process.
Judicial Support For Reforms
Recent judicial decisions have highlighted the need for a more structured approach to insolvency resolution. The NCLT’s approach to consolidation in cases like Videocon has paved the way for further reforms. The lack of a statutory framework for coordinated CIRPs has hindered effective implementation of these cases.
Balancing Powers In Resolution Process
Concerns have been raised about the balance of power between resolution professionals and the Committee of Creditors (CoC). Experts caution against excessive interference by the CoC, which could diminish the effectiveness of resolution professionals. Maintaining a proper balance of authority is crucial to ensure that the insolvency resolution process functions smoothly.
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