Regulator IBBI has proposed changes to the norms governing the insolvency resolution process for personal guarantors to corporate debtors, including the exclusion of related parties of the guarantor from voting on the repayment plan.
Besides, the watchdog plans to make valuation of a personal guarantor’s assets mandatory during the resolution process, as well as put in place the framework for recording creditors’ deliberations on the repayment plan.
In the proposed amendments in the rules to strengthen safeguards in the insolvency resolution process for personal guarantors to the corporate debtors, IBBI has also called for identification and reporting of avoidance transactions (preferential, undervalued, fraudulent, and extortionate credit transactions) in the insolvency resolution process.
The proposals come against the backdrop of the insolvency case involving Essel Group chairman Subhash Chandra, wherein under a settlement plan it was proposed that creditors could recover just about ₹6.5 crore from his personal estate against claims of roughly ₹22,006 crore.
On September 1, a five-member special bench of the National Company Law Tribunal (NCLT) barred Chandra from alienating his properties and issued notices to all parties in the case.
The case is now also before the National Company Law Appellate Tribunal (NCLAT), after dissenting lenders challenged the repayment plan.
In a discussion paper on September 12, the Insolvency and Bankruptcy Board of India (IBBI) proposed calibrated amendments to the insolvency process regulations on the exclusion of related parties of the guarantor from voting on the repayment plan.
Currently, an associate of a personal guarantor is barred from voting on the repayment plan.
IBBI has suggested that a related party of the guarantor shall be assigned a ‘nil’ voting share and the list of creditors prepared by the resolution professional shall separately indicate whether a creditor is a related party of the guarantor.
Another amendment planned is for the resolution professional to appoint a registered valuer to determine the fair value and the realisable value of the assets of the guarantor.
“The fair value, the realisable value and the valuation report should be placed before the creditors, along with the repayment plan, for their consideration,” IBBI said and added that it would enable creditors to make an informed and commercially prudent assessment.
The regulator has also proposed that the resolution professional 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.
In case the repayment plan amount is significantly lower than the amount of their admitted claims or the estimated realisable value of the assets of the guarantor, IBBI has proposed that the creditors should specifically record the commercial rationale for considering the repayment plan approval as a better alternative to bankruptcy process initiation.
Also, the watchdog has proposed that the resolution professional shall examine whether the personal guarantor has been party to any avoidance transactions and provide information to the creditors before they vote on the repayment plan.
Stakeholders’ comments have been sought on the proposed amendments to the rules till October 3.
Meanwhile, the dispute centres around a repayment plan under which Chandra was allowed to settle claims arising from personal guarantees on his group’s borrowings for just ₹6.5 crore – a 99.9 per cent haircut on the ₹22,006 crore his companies have defaulted on.
Chandra has argued that the widely cited ₹22,006-crore figure does not represent the money he personally borrowed. Instead, he says it comprises claims arising from guarantees he gave for loans raised by Essel Group companies. He has put the personal guarantee claims at about ₹3,990 crore, saying the larger figure relates to claims against the underlying corporate borrowers.
On September 9, IBBI asked insolvency professionals to carry out due diligence to ensure that the insolvency resolution framework is not misused mitigating tax liabilities, closing companies without regulatory scrutiny and other activities.
IBBI is a key institution in implementing the Insolvency and Bankruptcy Code (IBC), which provides for a time-bound and market-linked resolution of stressed assets.
