Corporate insolvency and resolution is a work in progress. To smooth out its kinks, the Insolvency and Bankruptcy Board of India (IBBI) had, last week, proposed additional changes, allowing companies to withdraw an application from undergoing the insolvency process. Such an option doesn’t exist now, and as a result though, several applications are filed; the Adjudicating Authority has shot them down. It also kept promoters away from regaining control despite lenders’ blessings.
Last week, IBBI issued a new set of draft regulations and has invited comments. As part of the proposals, besides allowing withdrawal of applications, IBBI also proposed easing financial support to liquidators in the event of an entity undergoing liquidation.
Under Section 12A of IBC, IBBI proposes to allow the withdrawal of application admitted under Section 7, 9 or 10 of the Code, on an application made by the applicant with the approval of 90 per cent voting share of the Committee of Creditors (CoC). Such an option could give promoters another shot to regain control despite defaulting on debt obligations. In the recent past, there have been several judgments on withdrawal under Section 12A. In one instance, the CoC unanimously approved withdrawal of the application, but the National Company Law Appellate Tribunal held that the resolution professional cannot file such an application, as only the applicant can move for withdrawal before the Adjudicating Authority. In another instance, withdrawal wasn’t allowed as CIRP regulations do not permit withdrawal after the issue of invitation of Expression of Interest.
These may be consigned to history if the draft regulations are notified. If so, the Code will allow withdrawal any time. That is, before and after the constitution of the CoC and even after invitation of Expression of Interest, but only in exceptional cases. Here too, the application must be moved by the applicant and not the resolution professional.
Meanwhile, sometimes the liquidator faces an acute shortage of funds and in some cases, the assets of the corporate debtor aren’t enough to cover even the liquidation cost. Hence, it was suggested that the cost of liquidation may be borne by the financial creditors upfront and the same may be recovered from sale of assets.
This may, however, be burdensome for retail individual creditors and it’s therefore proposed that secured institutional financial creditors may be obliged to bring in interim finance to run the corporate debtor as a going concern or liquidate the CD, if there are no liquid assets available to defray these expenses.