This institution of the IUs seeks to cure one of the problems that plagued the erstwhile insolvency regime i.e. of discovering and disclosing the true nature of the borrower’s financial liabilities to its various creditors.
As soon as the insolvency of a borrower would be triggered, all creditors would individually and collectively try to ascertain the financial picture of the defaulting borrower, during the course of which, the borrower would (more often than not) lose value each day spent ‘ascertaining’.
And while the NCLT has been passing orders admitting various insolvency applications, none have reached the statutory 180-day deadline. It would have been a safe presumption that the corporate insolvency resolution process wasn’t functioning as smoothly as it should have been.
However, with the regulation relating to IUs having come into force, confidence has been restored.
These regulations provide the eligibility criteria for registration of an IU under the Code. The regulations also provide the applicant with the opportunity of being heard and an opportunity to cure defects in the application, and also a provision for reasons for not being granted the registration as well. But, fall short of according any appeal against the order of the IBBI.
Further, governance requirements have been looked after by ensuring a minimum of 51% directorship of independent directors on the board of the IU and by limiting the maximum shareholding of the IU by a single person at 10%.
Although, any government company, public financial institution, stock exchange, depository, bank or insurance company may by themselves or together hold up to 25% of the paid up equity capital or total voting power.
The Regulations also provide for the persons allowed to access the IU database and interoperability provisions but fails to establish a situation of breach of the IU database.
The provisions relating to voluntary liquidation contained in the Companies Act, 2013 were omitted by the virtue of the amendments brought about by Section 255 of the Code.
And these new provisions also brought an end to the creditors’ winding up powers as were contained in the Companies Act, 1956; however creditors’ consent remains necessary for a final order of liquidation in this case as well.
These regulations provide the process from initiation of voluntary liquidation of a corporate person – companies, limited liability partnerships and any other persons incorporated with limited liability – till its dissolution
Unlike compulsory liquidation (and as provided for under Section 59 of the Code and Rule 3 of these regulations), voluntary liquidation requires the corporate person to have ‘no debts’ or be ‘able to pay its debts’; thus the need for voluntary liquidation doesn’t arise out of the ‘inability to pay debts’. In fact, inability to pay debts as ground for winding up has also been omitted under Section 271 of the Companies Act, 2013, which is now dealt with under sections 7-9 of the Code.
Much like the liquidation proceedings regulations, these regulations also provide for cases in which an insolvency professional can serve as a liquidator. An additional prohibition on an insolvency professional becoming a liquidator has been added,
“ An insolvency professional shall not be eligible to be appointed as a liquidator if he, or the insolvency professional entity of which he is a partner or director is under a restraint order of the Board.”
The regulations further provide for the process involving claims of various stakeholders including financial as well as operational creditors and provide for rules pertaining to disbursement of monies collected.
News Source - Bar & Bench