DISCUSSION OF INSOLVENCY REFORM UNDERWAY

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The Insolvency and Bankruptcy Board of India (IBBI) Proposes Significant Changes in Insolvency Proceedings

The IBBI has put forward a set of proposals aimed at enhancing the transparency and efficiency of insolvency proceedings. One of the key recommendations is that valuers should provide a clear explanation of their valuation methodology to the committee of creditors (CoC) before finalizing the valuation report. Currently, the CoC only receives the valuation report after receiving resolution plans, leading to a limited understanding of crucial valuations, such as Fair Value and Liquidation Value.

This lack of information can impede the CoC’s decision-making regarding the eligibility criteria for resolution applicants and the evaluation matrix. To address this issue, the IBBI has suggested structuring the resolution plan into two parts: one focusing on payments or inflows under the plan and the other on the distribution to various stakeholders. In cases of disputes or litigation, any contested amounts may be placed in an escrow account and distributed once the legal proceedings related to distribution are finalized.

The discussion paper also calls for more clarity on the minimum entitlement for dissenting financial creditors. Additionally, it proposes that insolvency professionals (IPs) seek approval for all components of the insolvency resolution process cost, including expenses related to the ongoing operations of the debtor.

To ensure a time-bound resolution process, the IBBI suggests that the Resolution Professional (RP) should conduct regular monthly meetings with the Committee of Creditors (CoC). These proposed changes are geared towards streamlining the insolvency process in India.

In another development related to insolvency, Tata Steel recently received a favorable judgment from the Delhi High Court concerning an income tax demand associated with its acquisition of Bhushan Steel Ltd. The revenue department had raised a tax demand of Rs 257.8 crore from Tata Steel for the four assessment years before the acquisition of Bhushan Steel under the Insolvency and Bankruptcy Code, 2016. Bhushan Steel was acquired by a Tata Steel subsidiary, Authorisation Bamnipal Steel Ltd, with its resolution plan approved by the National Company Law Tribunal (NCLT) on May 15, 2018.

The Income Tax department had issued a notice inquiring about the imposition of a penalty on August 28, 2018, following the plan’s approval, which was later reaffirmed by the National Company Law Appellate Tribunal on August 8, 2018. Tata Steel challenged this demand in the Delhi HC through a writ petition, questioning the jurisdiction of the revenue department to enforce the tax and penalty.

The court, in its judgment on October 31, ruled that the demand pertained to periods preceding the NCLT’s approval of the resolution plan and, therefore, fell within the “clean slate” principle. This principle holds that a successful applicant whose resolution plan has been approved should not be required to settle dues for the period before the plan’s approval. The court emphasized that the 2016 Insolvency and Bankruptcy Code would override other statutes if any inconsistencies were present, including the 1961 Act, thus providing relief to Tata Steel in this case.

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