The proposed changes address various aspects of CIRP, including appointment of registered valuers, cost reduction for smaller companies, representation of creditors in class, and guarantor liability. This article delves into the proposals outlined in IBBI’s paper, analysing their potential impact and considering areas for further improvement.

• Valuation of corporate debtor as a whole

The CIRP Regulations envisage the appointment of two registered valuers to determine the fair value and the liquidation value of the corporate debtor. Here, a registered valuer means a person registered as such in accordance with the Companies Act, 2013, and the rules made thereunder. The provisions pertaining to eligibility, qualifications and registration of valuers are contained in the Companies (Registered Valuers and Valuation) Rules, 2017 (Valuation Rules). These rules apply for the valuation in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the provision of the Act or the rules.

While the said rules provide for valuation to be carried out by a single valuer as a whole, the CIRP Regulations call for the appointment of separate registered valuers in each asset class. This results in the possibility of six registered valuers being appointed, i.e., two registered valuers in each of the three asset classes (viz. a) plant and machinery, b) land and building, and c) securities or financial assets).

To ensure that the provisions of the CIRP Regulations are consistent with those of the Valuation Rules and to bring in uniformity in the practices followed in the market, it is proposed that only two valuers be appointed for the valuation of the corporate debtor as a whole.

Comment: One can argue that this proposal undermines the valuer’s qualification requirements, especially in light of the significance of accurate valuation in the CIRP process. Further, a valuer’s qualifications are considered for determining eligibility for registration under the Valuation Rules. For instance, if the two registered valuers appointed by the resolution professional are graduates in civil engineering or architecture with relevant experience, the valuation of the corporate debtor as a whole carried out per the proposed mechanism might not be accurate as regards assets such as shares, debentures and so on. Though such a valuer would be at liberty, under Rule 8(2) of the Valuation Rules, to obtain inputs for other asset classes or get the valuation for an asset class conducted from another registered valuer, the same would not be mandatory if the proposed amendment is implemented and consequently will increase the chances of inaccurate valuations.

• CIRP of smaller companies, MSMEs – only one registered valuer to be appointed

As mentioned earlier, the present framework of the CIRP Regulations requires the resolution professional to appoint two registered valuers. In case the estimates of a value submitted by these valuers are significantly different or on receipt of a proposal from the Committee of Creditors (CoC), a third registered valuer can be appointed.

With a view to reduce the CIRP costs, the IBBI seeks to mandate, as a default position, the appointment of only one registered valuer in the CIRP of corporate debtors which have an asset size of up to Rs.1000 Cr or are classified as micro, small and medium enterprises (MSMEs). It is clarified that in case the CoC decides to have two registered valuers instead of one, the reasons for the same have to be recorded before the resolution professional takes steps to make the appointments.

Comment: The proposed amendment to Regulation 27 clearly encourages reduction in CIRP costs while maintaining a balance by providing the option to the CoC to resolve to appoint two registered valuers where essential, depending on the complexities of valuing assets of the corporate debtors on a case-by-case basis provided reasons are recorded for such appointments.

• Authorised representative of financial creditors – interim arrangement before appointment

As per the CIRP Regulations, for representation of creditors in a class, the interim resolution professional identifies three insolvency professionals and obtains their consent to act as the authorised representative before making their names public. Thereafter, the insolvency professional who is the choice of the highest number of financial creditors in the class is selected and the interim resolution professional makes an application to the Adjudicating Authority for his appointment as the authorised representative. However, delays in the appointment prevent the authorised representative from attending the CoC meetings which adversely affects the creditors’ ability to exercise their rights.

To address this issue, IBBI has put forward a proposal to allow the selected insolvency professional to attend CoC meetings once an application for his appointment is submitted. Additionally, he would be required to perform the specified duties in the intermediate period, on the Adjudicatory Authority being intimated to such effect.

Comment: It is amply clear that the amendment has been proposed to expedite the CIRP process and avoid unnecessary delay arising out of pendency of legal proceedings relating to the appointment of authorised representatives of financial creditors of each class. The aforesaid amendment would also facilitate in avoiding unnecessary legal proceedings filed by financial creditors of various classes aggrieved due to non-representation on the CoC.

• Resolution plan does not discharge guarantor’s liability

The discussion paper refers to the decision of the Supreme Court in Lalit Kumar Jain v. Union of India and Ors.[3] wherein it was noted that the approval of the resolution plan did not ipso facto operate as a discharge of the guarantor’s liability under the contract of guarantee. It was reiterated that the discharge of the principal debtor by an involuntary process, i.e., by operation of law or due to liquidation or insolvency proceeding, did not absolve the guarantor of his liability. Such liability was said to stem from an independent contract.

Following this ruling, IBBI intends to bring in an amendment specifying that the resolution plan does not prevent creditors from enforcing their rights against the corporate debtor’s guarantors.

Comment: Such an amendment will certainly give clarity regarding the enforcement of creditors’ rights to proceed against guarantors. Regulation 37 of the CIRP Regulations lists the measures to be provided under the resolution plan for insolvency resolution of the corporate debtor for maximization of asset value. The proviso sought to be added to Section 37(f) clearly clarifies that in cases where a resolution plan proposes reduction in amounts payable to creditors and where such amounts due are secured by guarantees from guarantors, the creditors’ right to proceed and recover the balance amount due from the guarantors would continue to be enforceable.

Remarks

The proposed amendments are meaningful and material in furthering the objective and effectiveness of the CIRP / Resolution of corporate debtors in an economical and expeditious manner. The amendments also preserve the right of the CoC to take reasoned decisions based on its commercial wisdom and the complexities of each case. The right of financial creditors to recover balance amounts due from guarantors over and above amounts received under the resolution plan has also been rightly preserved.