IBBI’s Update to CIRP Regulations: Revisions and Reflections

The Insolvency and Bankruptcy Board of India (IBBI), the market regulator, responsible for overseeing the implementation of the Insolvency and Bankruptcy Code¹ (IBC), has been making constant amendments to the IBBI Regulations in lieu of striking a balance between the ground realities of the corporate insolvency resolution process and the mandate of IBC. In November 2023, IBBI issued two discussion papers, proposing certain amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations)². While one³ aimed to address the issues related to real-estate project insolvencies, and the other⁴, aimed to suggest measures to streamline the corporate insolvency resolution process. In a recent amendment dated 15-2-2024, IBBI notified the amended CIRP Regulations⁵ incorporating certain proposals outlined in those discussion papers.

The authors aim to debunk the rationale, implications, and potential challenges of the amended Regulations. The goal is to analyse if the present amendment aligns with the practical realities of the insolvency resolution process.

Separate bank account for each real estate project

The newly inserted Regulation 4-D of the CIRP Regulations⁶ mandate the operation of dedicated bank account for each real estate project by the interim resolution professionals (IRP) or the resolution professional (RP), as the case may be. Pursuant from the recommendations made by the Amitabh Kant Committee Report⁷ on Real Estate Projects, this move aligns with the regulatory framework established by Real Estate (Regulation and Development) Act, 2016 (RERA)⁸, wherein each real estate project is registered separately for project-wise record-keeping and accountability. The mandate will ensure that all financial transactions related to a specific project are recorded accurately, facilitating better tracking of receipts and payments. This, in turn, aids in monitoring the progress of individual projects, identifying potential issues, and making informed decisions.

While Regulation 4-D represents a significant step towards enhancing financial accountability in real estate insolvencies, certain considerations and potential implications merit further clarification. Firstly, the amendment would benefit from clarification regarding the applicability of the requirement to dormant or inactive projects owned by the corporate debtor (CD). Real estate companies often possess a portfolio of projects at various stages of development, including those that may be shelved or undergoing regulatory approvals. Opening a bank account for such a non-operational real estate project would not serve any fruitful purpose. Clarification is needed on whether separate accounts should be established for such projects to ensure compliance and avoid ambiguity in implementation. Secondly, clarity is warranted concerning the permissible utilisation of funds held in these separate accounts. It is imperative for the IRP/RP to receive guidance on whether funds from one project’s account can be utilised for the insolvency resolution process costs incurred during the corporate insolvency resolution process of the entire corporate debtor or if they are strictly designated for the specific project’s resolution efforts.

Approval of CIRP costs

The newly inserted Regulation 31-B⁹ introduces a significant procedural change requiring the IRP/RP to seek approval from the CoC, in each of its meetings, for all costs related to the corporate insolvency resolution process along with providing the operational status of the corporate debtor.

While the intention is to streamline the process, an important challenge poses for operational companies undergoing corporate insolvency resolution process wherein the usual practice is to prepare the profit and loss statements on a quarterly basis and with this amendment, it is unclear as to how the costs related to maintaining the corporate debtor as a going concern are dealt with and the scope of the term “operational status”. This could result in administrative challenges and strain on resources for both the IRP/RP and the CD. One potential solution to mitigate operational challenges could be to seek omnibus approval from the CoC in the initial meeting, covering anticipated expenses for a specified period, particularly those pertaining to maintaining the going concern status of the CD. This approach would provide flexibility while ensuring appropriate oversight. Furthermore, one question arises regarding the timing of expenditure due to the use of the term “approval”. Does this imply that the IP must await CoC’s approval before incurring expenses to maintain the CD as a going concern? Such ambiguity could hinder the broader intent of the legislature to provide for the ongoing costs of the CD more so when the CD has internal accruals.

Disclosure of fair value in information memorandum

Under the amended Regulations, the fair value of CD needs to be disclosed in the information memorandum (IM).¹⁰ Although, this move is driven by the belief that transparent disclosure of fair value would attract serious bidders and enhanced competition practically, if all the resolution applicants have access to the same fair value information, there is a risk that bids may converge around this value, reducing competition and potentially limiting value realisation. Noteworthy is the discretionary power of the CoC to evaluate the specific circumstances of the resolution process and determine whether disclosure is beneficial or not. Such a case-by-case approach would rightfully address this practical implication.

Herein, IBBI should clarify whether previously issued IMs need to be amended to incorporate fair value disclosure. It emphasises that if such amendments are necessary, resolution applicants must be provided with sufficient time to adjust their bids and conduct thorough due diligence based on the updated information. Failing to address this issue could result in confusion and potential challenges in the resolution process.

Separate plans for separate real estate projects

The Amendment clarifies that RP may invite separate resolution plans for each real estate project or group of projects of the CD, after approval from the CoC.¹¹ The reform stems from the need to accommodate the intricacies of the real estate sector. It acknowledges that a real estate company with multiple projects at varying stages of completion may require distinct treatment during the resolution process. Segmenting the company into projects by allowing separate resolution plans for each project enables resolution applicants to focus on specific projects based on their viability and potential for recovery.

However, there is a practical hurdle in segregating CD’s assets and liabilities, particularly when CD’s balance sheet is prepared as a whole. The complexity intensifies when attempting to allocate liabilities related to various taxes, such as income tax, GST, DTCP, and other government taxes and fees. Additionally, while it is an encouraging move to invite separate plans for separate real estate projects, the authors opine that a similar provision should have been made to enable the invitation of resolution plans for each unit or business separately considering the challenges involved in inviting plans for corporate debtors having two distinct businesses/units.

Electronic voting timeline

The modified Regulation 25(5)(b)¹² empowers the CoC to set the duration of the electronic voting window, ranging from a minimum of 24 hours to a maximum of 7 days, with additional 24 hour increments if necessary. Additionally, if the issues under consideration have already garnered the necessary majority vote, the RP shall not extend the voting window if one extension has already been given after the receipt of the requisite majority vote. This moves by setting clear expectations, firstly, emphasises the importance of timely decision-making allowing for the efficient implementation of resolutions, and secondly, grants flexibility to the creditors by granting them the opportunity to request extensions.

Extended obligations of RP

Under the revised Regulation 18(1)¹³, RP is obligated to convene a CoC meeting at least once every thirty days, with the provision to extend the interval between meetings, to a maximum of one meeting per quarter, subject to the decision of the CoC. It acknowledges that while regular meetings are essential for maintaining the momentum and stakeholders’ trust in the CIRP framework, excessive meetings may lead to inefficiencies and unnecessary disruptions. This flexibility underscores a balanced approach that promotes efficiency without inadvertently overlooking the broader intent of the CIRP, which prioritises consistent monitoring and swift resolution.

Furthermore, Regulation 35(2)¹⁴ is modified to ensure that RP also discloses the valuation reports in addition to the earlier obligation of disclosing the fair value and liquidation value to every member of the CoC in electronic form. This will provide the CoC with critical information to make informed decisions while voting on resolution plan(s).

Additionally, the amendment inserts a clarification into Regulation 40 after sub-regulation (2)¹⁵, stipulating that the RP shall continue to discharge their responsibilities under the corporate insolvency resolution process until the adjudicating authority decides on an application for extension.

Conclusion

Overall, the Amendment reflects an ongoing effort to refine and improve the insolvency resolution process to achieve its objectives of transparency, maximisation of value, and fair treatment of stakeholders. It highlights a proactive stance to enhance the efficiency and effectiveness of the CIRP. These amendments aim to address gaps in the insolvency resolution process nationwide, reflecting the IBBI’s attentiveness to practical challenges and its commitment to resolving issues that hinder CIRP efficiency in India. However, critical considerations as discussed remain. Further clarification and adaptation are essential to ensure the effectiveness and efficiency of insolvency resolution in India.