Regulation 38 of the IBBI (CIRP) Regulations: All Amendments till Date

  April 25, 2022

The Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency Resolution Process for Corporate Persons Regulation, 2016 several times as necessitated. Specifically, a lot of changes have been made to Regulation 38.

Regulation 38: Mandatory Contents of a Resolution Plan

Before the substitutions and amendments, Regulation 38 specified the compulsory provisions that needed to be mentioned in the resolution plan for it to demonstrate its objective of resolution in a clearer and surer way. Sub-regulation 1 mentioned that the resolution plan shall identify specific sources of funds that will be used to pay the: –

  • Insolvency resolution process costs and provide that the insolvency resolution process costs will be paid in priority to any other creditor;
  • Liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority; and
  • Liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favor of the resolution plan.

Sub-regulation 2 stipulated that the resolution plan shall provide:

  • the term of the plan and its implementation schedule;
  • the management and control of the business of the corporate debtor during its term; and
  • adequate means for supervising its implementation.

Over the last few years, the requisites mentioned in this regulation have gone through several amendments, that shall be discussed here.

1.      Amendment of 5th October 2017:

Under this amendment, a sub-regulation was inserted:

(1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.[1]

2.      Amendment of 7th November 2017:

This amendment inserted another sub-regulation:

(3) A resolution plan shall 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.[2]

 This amendment required the resolution plan to disclose details of the resolution applicant and other connected persons to enable the Committee of Creditors (“CoC”) to assess the credibility of such applicants and other entities associated, and take a prudent decision. These details were needed to encompass the:

  • Resolution applicant,
  • Promoters or management who had some control of the resolution applicant;
  • Persons who were assigned to 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 also included details of convictions, pending criminal proceedings, disqualifications under the Companies Act, 2013, orders or directions issued by the SEBI, categorization as a willful defaulter, etc.

For the purpose of this sub-regulation, ‘details’ included:

  • identities,
  • convictions, if any, in criminal proceedings during the last five years,
  • criminal proceedings, if any, pending as on date,
  • disqualifications, if any, incurred under Companies Act, 2013 to act as directors,
  • categorization as willful defaulter, if any, by a bank or financial institution or consortium thereof in accordance with the guidelines of the Reserve Bank of India,
  • debarments, if any, from accessing or trading in securities markets under any order or directions of the Securities and Exchange Board of India; and
  • transactions, if any, with the corporate debtor in the last two years. 

3.      Substitution of Sub-regulation on July 4th, 2018:

The sub-regulation mentioned above was substituted through this amendment. The new regulation was:

(3) A resolution plan shall demonstrate that –

  • it addresses the cause of default;
  • it is feasible and viable;
  • it has provisions for its effective implementation;
  • it has provisions for approvals required and the timeline for the same; and
  • the resolution applicant has the capability to implement the resolution plan.[3]

4. Amendment of October 5th, 2018:

The IBBI amended the CIRP Regulations for the fourth time in 2018 on 5 October, through the IBBI (Insolvency Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2018. Regulation 38(1) of the CIRP Regulations were amended to:

  • Remove provisions regarding payments towards insolvency resolution process cost (IRP Cost) and
  • Modify the provision regarding payment of liquidation value to operational creditors to state that such payment will be given priority in payment over financial creditors (previously, this payment had to be made within 30 days of the order of the National Company Law Tribunal (NCLT) approving the resolution plan).

The following conditions specified in Regulation 39 regarding the mandatory payments under Regulation 38(1), were also removed:

  • The obligation on the COC to specify, while approving a resolution plan, the amounts payable under Regulation 38(1) from the resources under the resolution plan; and
  • The obligation (inserted through the July 2018 amendment) requiring a prospective resolution applicant to submit an undertaking that it will provide for additional funds required for Regulation 38(1) payments.

Significance of this amendment:

The removal of the 30-day payment period for operational creditors’ liquidation value was perceived as a relief for the resolution applicants (RAs). Most COCs began to allow RAs to make upfront payments within certain days of the NCLT approval or give more than 30 days from the date of the approval. Pegging this payment to the financial creditor payment achieved the intended objective of protection of operational creditors without adversely impacting the RAs.[4]

The removal of dissenting financial creditors’ right to receive their liquidation value was mentioned in IBBI’s press release on the Amendment Regulations as a consequence of the change related to operational creditor payment. Unlike the IRP Cost and operational creditors, the obligation to pay liquidation value to the dissenting financial creditors’ protection was provided only under the CIRP Regulations and not under the Insolvency and Bankruptcy Code, 2016 (Code). In view of this provision, certain resolution plans provided that the dissenting financial creditors will only be paid their liquidation value.

But the National Company Law Appellate Tribunal in the case of Central Bank of India v Resolution Professional of Sirpur Paper Mills Limited and Ors[5] has held that no distinction should be made between payments to the financial creditors on the ground that they have dissented or consented to the resolution plan. IBBI’s removal of this provision appears to have been prompted by this judgment.

The rationale for deletion of the IRP Cost related provision from Regulation 38 is not provided in the Press Release. However, since the Code itself states that IRP Cost needs to be paid in priority to all other debts of the corporate debtor, the IBBI may have felt that Regulation 38(1)(a) was superfluous.

5. Amendment of January 24, 2019:

This amendment inserted the sub-regulation 1(B):

1(B) A resolution plan shall include a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past.[6]

This amendment enabled a creditor, who was aggrieved by non-implementation of a resolution plan approved by the Adjudicating Authority, to apply to the Adjudicating Authority for appropriate directions. As per the above insertion of sub-regulation (1B), it has now been made a prerequisite that the resolution applicant while providing its resolution plan should also give a declaration in the form of statement whether the Resolution Applicant itself or any of its related parties have in past have failed to implement any Resolution Plan proposed by them in respect to any Corporate Debtor which was successfully approved by the CoC as well as Adjudicating Authority.

6.  Amendment of November 27, 2019:

This amendment substituted Sub-regulation 1:

  • The amount payable under a resolution plan –

(a) to the operational creditors shall be paid in priority over financial creditors; and

(b) to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.[7] 

Significance of this amendment:

Initially, a dissenting financial was defined under Section 2(1)(f) of the Code as a financial creditor who voted against the resolution plan or abstained from voting for the resolution plan, approved by the committee. However, this was done away with the amendment that came shortly after the judgment of the National Company Law Appellate Tribunal (“NCLAT”) in Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd.[8], where it was observed that the Regulation 38 of the CIRP Regulations, as it stood before, was inconsistent with the Code.

It was observed that a resolution plan, that provided for liquidation value for dissenting financial creditors as per sub-regulation (c) of Regulation 38 (as it stood prior to the 2019 amendment) without any other reason, to discriminate between two sets of creditors similarly situated such as the financial creditors or the operational creditors, could not be approved, being illegal.

Hon’ble NCLAT upheld the fair and equitable treatment that is to be accorded to the creditors in Binani Industries Ltd. v. Bank of Baroda[9], holding that any resolution plan, if shown to be discriminatory against one or the other financial creditor or the operational creditor who are equally situated, such a plan would be held against the provisions of the Code.

 

After years of amendments and changes, presently Regulation 38 looks like this:

PRESENT 38. Mandatory Contents of the Resolution Plan.

  • The amount payable under a resolution plan –

(a) to the operational creditors shall be paid in priority over financial creditors; and

(b) to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.

 [(1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.]

[(1B) A resolution plan shall include a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past.] 

  • A resolution plan shall provide:

(a) the term of the plan and its implementation schedule;

(b) the management and control of the business of the corporate debtor during its term; and (c) adequate means for supervising its implementation. 

  • A resolution plan shall demonstrate that –

 (a) it addresses the cause of default;

(b) it is feasible and viable;

(c) it has provisions for its effective implementation;

(d) it has provisions for approvals required and the timeline for the same; and

(e) the resolution applicant has the capability to implement the resolution plan.

 

 

 

 

 

 

 

 

 

 

[1] Inserted by Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2017, Regulation 2 (w.e.f. 5-10-2017).

[2] Inserted by Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2017, Regulation 2 (w.e.f. 7-11-2017).

[3]  Substituted by Notification No. IBBI/2018-19/GN/REG031, dated 3rd July, 2018 (w.e.f. 04-07-2018).

[4] Ashwin Bishnoi, New Amendments to CIRP Regulations – relief for bidders and dissenting financial creditors, KHAITAN & CO, (Apr. 8, 2022, 4:29 PM), https://www.khaitanco.com/thought-leadership/new-amendments-to-CIRP-regulations%E2%80%93relief-for-bidders-and-dissenting-financial-creditors.

[5] NCLAT order dated 12 September 2018.

[6] Inserted by Notification No. IBBI/2019-20/ GN/ REG040, dated 24th January, 2019 (w.e.f. 24-01-2019).

[7] Substituted by Notification No. IBBI/2019-20/GN/REG052, dated 27th November, 2019 (w.e.f. 28.11.2019).

[8] Company Appeal (AT) (Insolvency) No. 526 of 2018 .

[9] Company Appeal(AT) (Insolvency) No. 82 of 2018.

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