After Subhash Chandra case, bankruptcy board’s push for tighter safeguards

“For instance, a company that habitually acts on the guarantor’s advice or instructions, without the guarantor holding any shares in it or otherwise controlling its board, would qualify as a ‘related party’ even though it would fall outside the definition of ‘associate’,” said the regulator in its discussion paper seeking public comments until October 3.

The proposal has come in the backdrop of a special National Company Law Tribunal (NCLT) bench staying the order of its single bench in the Subhash Chandra case. On August 25, the NCLT single bench approved a repayment plan involving personal guarantor and Essel Group founder Subhash Chandra, under which creditors were offered just Rs 6.25 crore against their admitted claims of Rs 22,006.57 crore.

Chandra’s case puts bankruptcy code under scrutiny

The matter created a major controversy in the public domain, with experts questioning the efficacy of the Insolvency and Bankruptcy Code (IBC), which was introduced in 2016 to revive companies under huge debt and ensure repayment to banks.

In Chandra’s case, the banks alleged that the non-bank entities were associates or related parties of the guarantor and acted under Chandra’s influence to push the plan with a huge haircut.

The IBBI’s proposed amendment also mandates resolution professionals to examine whether the guarantor was party to any avoidance transactions — undervalued, preference transactions, and extortionate credit transactions — during the resolution stage itself, present their findings to creditors prior to voting, and initiate legal proceedings with creditor approval.

Unlike CIRP, when the guarantor’s repayment plan is put to a vote, the resolution professional is under no obligation to examine whether any such transaction took place and if the guarantor made full disclosure of affairs.

Asset valuation, creditors’ views and reasons to be recorded

The third proposed amendment relates to the asset valuation of the personal guarantor in the resolution process. The resolution professionals will have to appoint a registered valuer to determine the fair value and realisable value of assets and submit the valuation report to creditors, along with the repayment plan, for their consideration.

“This would enable creditors to make an informed and commercially prudent assessment of the adequacy of the proposed security, the overall viability of the repayment plan, and the potential recovery available from the assets of the guarantor,” said the IBBI.

The insolvency regulatory body also proposed to include detailed objection and assessment of the creditors regarding the repayment plan. As of now, in personal guarantors’ cases, the resolution professionals are only required to record raw voting tallies without documenting the commercial reasoning of the creditors.

The proposal says that resolution professionals will be required to record, in the minutes of the meeting of creditors, the deliberations of the creditors and the reasons for their decision on the repayment plan.

“Where the amount proposed to be paid to creditors under the repayment plan is significantly lower than the amount of their admitted claims or the estimated realisable value of the assets of the guarantor, the creditors should specifically record the commercial rationale for considering approval of the repayment plan as a better alternative to the decision of initiation of a bankruptcy process,” said the board.

IBBI said this will promote transparency, accountability and informed decision-making. It will ensure that approval of a repayment plan rests on an objective assessment of the recovery prospects available to them.