MC EXCLUSIVE IBC Amendment Bill: Centre re-examining draft 'out-of-court' insolvency rules to minimize litigation

The government does not want to leave any ambiguity under the new law that could give space for any litigation. The recent JSW-BPSL episode had briefly dampened investor confidence, which was restored once the Supreme Court reversed its ruling while upholding the tenets of IBC, officials said.

What is CIIRP?

The CIIRP will be different from the corporate insolvency resolution process CIRP, which comes into effect after the National Company Law Tribunal (NCLT) passes an order to initiate insolvency proceedings against a bankrupt company.

According to the IBC, the CIRP begins after a financial creditor (FC), operational creditor (OC), or the corporate debtor itself files an application with the NCLT (the Adjudicating Authority) to initiate the process due to a default in debt payment. The NCLT then reviews the application, and if it is satisfied that a default has occurred, it passes the commencement order.

The CIIRP, on the other hand, proposes that it will commence of two specific conditions - (a) on an existence of a default; and (b) on approval of 51% of financial creditors (who opt for the out-of-court process). The financial creditors who choose to opt for CIIRP will be notified by the government, implying, not every FC can be approved for CIIRP.

Also, under CIIRP, there will be no automatic moratorium imposed on the corporate debtor, contrary to the CIRP. The moratorium offers a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.

The moratorium under CIRP comes in effect when the proceedings commence and stays until its conclusion.

Possibilities of Litigation? 

Experts believe that some current provisions under the CIIRP may lead to litigations, such as - (i) calculation of 51% value of the debt due to the financial creditors belonging to the class of notified institutions, for initiation of CIIRP; and (ii) no automatic moratorium upon commencement of CIIRP.

The proposed amendment does not currently clarify the principles and reference date for calculation of debt for initiation of CIIRP, including in relation to treatment of contingent debts, inclusion of different classes of financial creditors and therefore, creditors who are excluded from the calculation or who disagree with the value attributed to their claims may challenge the initiation of CIIRP, leading to litigation, said Anoop Rawat, Partner at Shardul Amarchand Mangaldas & Co.

Second, since there is no automatic moratorium, creditors (including OCs and FCs not in favour of filing for moratorium) may rush to enforce their claims or initiate recovery proceedings in the window between the public announcement of CIIRP and the grant of a moratorium, leading to value erosion and multiple litigations, he said. "In fact, even the creditors who initiate the CIIRP may also simultaneously pursue enforcement actions against the corporate debtor, leading to duality of proceedings."

Sonam Chandwani, Managing Partner at KS Legal & Associates said that the CIIRP, by design, empowers creditors to trigger insolvency outside the NCLT framework. “While the intent is speed, the risk lies in ambiguity what constitutes 'initiation', how borrower consent is recorded, whether such initiation binds guarantors, and how dissenting creditors are treated. Each of these unanswered questions could become fertile ground for challenge,” she said.

“Moreover, the lack of judicial oversight at the initiation stage might itself be contested as violative of natural justice by defaulting promoters,” Chandwani added.

‘Provisions should be refined to avoid ambiguity’

Some experts believe the draft Bill must lay down a transparent notice and response mechanism for borrowers during the CIIRP, spelling out inter-creditor rights so that dissenting voices do not derail the process through litigation. While the idea is to reduce NCLT’s load, the law should still preserve a limited appellate role for the tribunal to ensure procedural fairness, they said.

Others say that the veto right of the resolution professional (RP) in board meetings shall be final and cannot be challenged (at the maximum, the same can be considered by the CoC). “And that there should be an automatic interim moratorium ‘covering few key items’ pertaining to transfer of assets of the corporate debtor, security enforcement etc, instead of RP applying to the NCLT for the same,” said Abhishek Mukherjee, Partner, Cyril Amarchand Mangaldas.

To minimise disputes, Alay Razvi, Managing Partner at Accord Juris suggests hard coding eligibility criteria in the statute (for FCs), limiting debtor objections to narrow grounds, balancing creditor thresholds, defining non-cooperation more clearly, and placing guardrails on delegated rule-making.

Khaitan & Co’s Partner Siddharth Srivastava, however, feels that the proposed bill incorporates ample checks and balances to avoid “multiple litigations”. “This includes provisions for representation to the financial creditor before CIIRP initiation, and right of the corporate debtor to approach the adjudicating authority in case of subsequent objections to CIIRP initiation,” Srivastava said.