Some gaps in ILC recommendations on resolution process, say experts

Report seen as unclear on who should pursue cases related to avoidable transactions and improper trading under bankruptcy code

A report by the Insolvency Law Committee (ILC) has said the resolution process of insolvent firms could be expedited by continuing legal action against improper or fraudulent transactions even after the corporate resolution process has been completed.

The report however doesn’t say who should take charge of the legal action regarding such transactions, said Insolvency and Bankruptcy Code (IBC) experts.

The Committee cites transactions that may be wrong or fraudulent related to the insolvency process (avoidable transactions and improper trading). It considered the question whether legal action against such transactions should continue after the resolution process of an insolvent firm is over. The report noted two things would happen if they are not. First, National Company Law Tribunals would have to end cases related to such transactions before the approval of the resolution plan. Second, if such cases are not resolved till the completion of the resolution process, they would be termed unnecessary.

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Both cases would lead to undesirable outcomes, and so allowing such cases after approval of a resolution plan would be more efficient, the report said.

If an amendment is made to continue such legal proceedings after completion of the resolution process, who will take it up? A resolution professional (RP) initially reports improper transactions and he/she is discharged after the resolution process is over. Then the successful bidder of the resolution plan acquires the insolvent company.

“The applicant might say that they cannot pursue the avoidable transaction/improper trading litigation since it was the Resolution Professional(RP) who filed for the case. After the completion of the resolution process, the RP is discharged. In that sense, the law should clearly state who should pursue the litigation,” said Abhishek Swaroop, partner at Saraf and Partners.

In such a case, Swaroop said since the benefit of the resolution has gone to the resolution applicant/successful bidder, he/she should pursue such legal proceedings. “Once a successful resolution plan is implemented, the NCLT can issue a notice stating that such cases are pending. The successful resolution applicant can then take over,” he said.

The Committee has also revised the period during which improper or fraudulent transactions can be reported. Earlier, such transactions were vetted after the resolution process had started. Now, the Committee recommends that such transactions should be netted right after a firm files for insolvency. “Nowadays, defaulting companies start taking preemptive steps before filing for the Corporate Insolvency Resolution Process(CIRP). This change would rectify that and make the resolution process more effective,” Swaroop said.

Another important aspect the report talks about is that secured creditors (who have stepped out of the liquidation process by choosing to realise their interest elsewhere) should also be required to contribute towards workmen’s dues. Sometimes such creditors might choose to not put their assets in the liquidation pool and choose other mechanisms for quicker recovery. Even in such cases, the Committee has recommended that these creditors should pay the workmen.

“These workmen dues are of the past 24 months when the company was in distress and the workmen chose to remain with the company in its critical time. This is a socially adept change. It recognises the distress of the workmen,” Swaroop said.