The Insolvency and Bankruptcy Code (IBC) has been dubbed as the game changer in the corporate circles and is laudable in its intent as the scheme of the Code is to see whether corporate debtors can be put back on their feet within a stipulated time frame to stave off liquidation by having a credible resolution plan. The extant scheme of the IBC is that any corporate applicant, including the former promoters of the company, can also give a resolution plan to the resolution professional (RP). There is no restriction imposed on who can be a "corporate applicant" and provide a resolution plan. The committee of creditors (CoC) is expected to choose the best resolution plan.
There has been a lot of public debate and opinions were divided among the legal and RP fraternity on whether promoters should have the right to bid for a resolution plan considering they might have been the people responsible for the initiation of the insolvency proceedings in the first place. Also, promoters would have a better insight into the existing business of the company, and they would be able to come up with a better bid in their resolution plan compared to others. The latter would be limited to their evaluation of information, published in the information memorandum, and considering the tight deadline, they may not be getting all the documents required for legal and financial diligence.
There was another issue among the CoC members. Should they only look at the financial value of the resolution and pick a plan (may be that of the promoters), which has the best value? Or do they have a fiduciary duty (akin to the fiduciary duty of the director under the Companies Act) and should look at the credibility of the applicants so that the present state of the company under liquidation does not happen again?
All these questions have been addressed, to some extent, by the regulator Insolvency and Bankruptcy Board of India (IBBI) in its latest press release dated November 7, 2017. In that release, it states that a resolution plan should contain details of the resolution applicant and other connected persons to enable the committee to assess the credibility of such applicant and other connected persons to take a prudent decision while considering the resolution plan for its approval.
To assess the credibility, the resolution plan should disclose the details of the resolution applicant, persons who are promoters or in management or control of the resolution applicant, persons who will be promoters or in management or control of the business of the corporate debtor during the implementation of the resolution plan, and their holding companies, subsidiary companies, associate companies and related parties, if any. It should also disclose details of convictions, pending criminal proceedings, disqualifications under the Companies Act, 2013, orders or directions issued by Sebi, categorisation as a wilful defaulter, etc. It is a welcome move as the CoC will have to check not only the credibility of the resolution applicant but also the credibility of the connected persons. This amendment, coupled with a previous amendment that a resolution plan must take care of the interest of all stakeholders, are welcome changes, which have been brought by the IBBI and which gives greater role and responsibility to the CoC while choosing the resolution plan.
Another interesting amendment, which puts a greater onus on the RPs, is the reporting of preferential transactions, undervalued transactions, extortionate credit transactions and fraudulent transactions to the CoC. There has been a debate as to whether RPs, with whom the management powers are vested (these were lying with the former board of directors), should also have the same duties as the board. In other words, would the principle of subrogation apply? This amendment has gone a long way in addressing that issue as the RPs must now mandatorily report such transactions to CoC and the failure to do so would open up litigation against the RPs as they may not be able to avail the "good faith" defence provided by the IBC. For undertaking such activities of diligence of transactions, would the RPs take forensic assistance? Also, in the event a member or creditor wishes to challenge any transaction in the manner provided under the Act, he/she may seek the directions of the National Company Law Tribunal (NCLT) for the discovery of the minutes of CoC meeting to find out whether such transactions were, indeed, reported and if yes, what actions were taken.
We are at the stage wherein some resolution plan would come up for approval from NCLT, and it would be interesting to watch the space going forward.
(The author is a partner at the law firm Lakshmikumaran and Sridharan.)