On January 6, 2020, the Insolvency and Bankruptcy Board of India (the "IBBI") notified the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020 (the "Amendment") to further amend the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (the "Regulations").1
The Amendment is with immediate effect and has been introduced to promote the development and regulation of the Insolvency and Bankruptcy Code of India, 2016 (the "Code"). We discuss below some of the key changes introduced by the Amendment.
2. KEY CHANGES
2.1. Corporate Liquidation Account
Previously, regulation 46 of the Regulations provided that, among other things, the process for the deposit and withdrawal of unclaimed proceeds of liquidation or undistributed assets or any other balance payable to the stakeholders is required to be in a 'companies liquidation account'.
The Amendment has substantially amended the said regulation and has substituted 'companies liquidation account' with 'corporate liquidation account' which is to be operated and maintained by the IBBI.
In a liquidation process, a liquidator is required to deposit the unclaimed dividends and undistributed proceeds along with any income earned thereon in the corporate liquidation account before an application for dissolution is submitted.
A new 'Form I' has been introduced in Schedule II of the Regulations to record the details of the liquidation process, the details of stakeholders entitled to unclaimed dividends or undistributed proceeds and the details of deposit made into the corporate liquidation account. The said form is required to be submitted by the liquidator to the NCLT and the IBBI against which the liquidator is entitled to a receipt from the IBBI.
A stakeholder or person entitled to any amount deposited in the corporate liquidation account, is required to apply in the newly introduced 'Form J' for withdrawal of the entitled amount along with requisite evidence to the IBBI. The IBBI, if satisfied by such claim, may order for the withdrawal of any amount in favour of the stakeholder or person.
Further, in order to incorporate the provision of corporate liquidation account in the Regulations, consequential changes have been made in:
- serial number 20 of the table in regulation 47;
- Form H; and
- Schedule III.
2.2. Ineligibility of corporate debtor to be party in compromises or arrangements
The Amendment has disqualified a person who is not eligible to submit a resolution plan under the Code from being a party in any compromise or arrangement of the corporate debtor under the Companies Act, 2013.
The change brought in by the Amendment is clarificatory in nature and brings the Regulations in line with the broader objectives of the Code.
2.3. Presumption of Security Interest
The Amendment has modified regulation 21A of the Regulations to additionally provide that when a secured creditor proceeds to realise its security interest, it would be subject to the following contributions: -
- relative shares of the secured creditor to the insolvency resolution process cost, liquidation process cost and workmen's dues, within 90 days of the liquidation commencement date; and
- excess of the realised value of the asset, being subject to security interest, over the amount of its claims admitted, within 180 days of the liquidation commencement date.
Further, if a secured creditor fails to pay such amounts to the liquidator within 90 days or 180 days, as the case may be, such asset shall become part of liquidation estate.
2.4. Realization of security interest by secured creditor
A new sub-clause has been introduced in regulation 37 of the Regulations that restricts the secured creditor from selling or transferring an asset, which is subject to a security interest, to any person who is not eligible under the Code to submit a resolution plan.
The Amendment intends to increase creditor confidence by preventing defaulting promoters from regaining control of their companies at the liquidation stage wherein it was seen that many promoters tried to get their companies back by proposing scheme of arrangements or compromises.
Further, in order to tighten the insolvency regulatory framework, secured creditors are now prohibited from selling the assets of the company to any person who is restricted from submitting an insolvency resolution plan.
Amendment to Regulation 46 has not only made deposits and withdrawal of unclaimed proceeds of liquidation or undistributed assets more controlled and streamlined but also introduced a process for withdrawal by stakeholders and persons thereby making the same more effective and transparent.
For further information, please contact:
Sushmita Gandhi, Partner, Induslaw