Proposed amendments to IBBI regulations
Strengthening the IBC Ecosystem: A Critical Analysis of the Proposed Changes to the IBBI (Information Utilities) Regulations
On May 10, 2024, the Insolvency and Bankruptcy Board of India (IBBI) published a discussion paper titled "Strengthening the process of issuance of record of default by Information Utility". The paper proposes changes to the IBBI (Information Utilities) Regulations, 2017 to improve the effectiveness and credibility of the Record of Default (RoD) issued by Information Utilities (IUs). The main proposals are:
Allow the debtor 7 days (rather than 3) to respond after receiving the IU's default notification. This would provide an equal opportunity for the approximately 16.80 lakh active corporations and 3.26 lakh LLPs in India to authenticate the default information. Deliver default information only to debtor-provided email addresses registered with the IU or recorded in MCA-21/CERSAI databases for creditors other than scheduled banks. This will make the RoD issuance process more reliable. Order creditors (with the exception of scheduled banks) to provide information to IUs in Form C along with a declaration of genuineness, and to upload evidence of debt/security, default, and the most recent debt acknowledgment. By doing this, IUs will be able to confirm the debt and default before issuing the RoD. Before providing the RoD to establish it as conclusive proof, IUs must appropriately verify the debtor's email address, proof of debt/security, the most recent debt acknowledgment, and the proof of default. To prevent pointless disagreements that cause a lot of corporations and limited liability partnerships to face delays in their bankruptcy, make it necessary for debtors to submit evidence of their disagreement if they contest the default information. If the debtor contests default in the case of scheduled banks and the IU has the most recent debt acknowledgment documentation, the RoD should still be issued as "authenticated." RoD should be issued as "authenticated" for the amount that is not challenged in partial disputes. include extra information in the RoD format, such as the kind of debt, the final date of repayment, specifics of the default notice, etc., to help the adjudicating authority make decisions more quickly when considering applications for insolvency. With these revisions, the roughly 16.80 lakh active firms and 3.26 lakh LLPs in India will have a reasonable chance and freedom to validate the default information, all while maintaining the time-bound nature of the procedure. Despite the fact that the ideas are well-meaning and could facilitate the insolvency resolution process, there are several issues that merit further in-depth analysis and thought.
Areas of concern :
Communicating Defaults to Debtors:
First, a fresh strategy is required for telling debtors about RoD. For instance, the IBBI (Information Utilities) Regulations' Regulation 21(2)(c) has to be reviewed. Currently, it stipulates that debtors must get notice of reduced obligations or reminders "by hand, post, or electronic means at the postal or e-mail address of the debtor." This needs to be changed to clarify that the debtor would initially be notified via email and text messaging like SMS and WhatsApp, among other technological means. And only when there has been no viable and effective way to communicate with debtors other than electronically, via mail notification and, in the event that this is not possible, newspaper ads, may be taken into consideration.
And only when there has been no viable and effective way to communicate with debtors other than electronically, via mail notification and, in the event that this is not possible, newspaper ads, may be taken into consideration. The IU should only be required to send a physical notice by registered post or speed post to the debtor's registered office address in the event that the debtor's emails are inaccessible or bounced. As a final resort, the IU should publish a public notice through a newspaper ad if the physical notification is likewise declared undeliverable. When it comes to reaching out to a large number of debtors, this graded and hybrid method that leverages digital communication will be more efficient, less expensive, and faster than first sending out physical warnings or placing ads in newspapers.
Disparate Handling of Banks and Other Debtors :
Second, the reasoning for treating banks differently than other creditors in terms of producing proof of debt, default, and most recent acknowledgment is flawed and unfair. It appears that bank records are more credible than those of other creditors simply because they are banks. This disregards the fact that, under the Companies Act of 2013, the Income Tax Act of 1961, and other legislation, all companies/LLPs with revenues exceeding certain levels must have their financial statements and records audited by independent chartered accountants. Audited financial statements of companies/LLPs, whether kept by banks or other creditors, shall be treated as equally authentic when presenting default information to IUs.
The reference to the Bankers' Books Evidence Act of 1891 for this distinction appears to be erroneous, as this century-old law only addresses the evidential value of bank records in legal proceedings, not their inherent dependability in comparison to records of other creditors. Many NBFCs, HFCs, and other financial creditors make big loans to businesses and keep thorough records subject to RBI requirements and audits. Treating them differently than banks for submitting default information would create an unequal playing field in the IBC process, undermining IUs' basic role as custodians of authenticated financial information.
As a result, the IBBI should establish a consistent and non-discriminatory method for all creditors to submit proofs of debt, default, and acknowledgment based on objective criteria such as loan value, kind of debt, and so on, rather than the creditor's identity as a bank or non-bank. For debts exceeding a specific value, such as INR 5 crores, a greater standard of proof may be required. According to the Reserve Bank of India, as of March 2023, India had 12 public sector banks and 22 private sector banks with assets totaling more than INR 180 trillion. In comparison, there were 93 NBFCs with asset sizes exceeding INR 5,000 crore, totaling approximately INR 33 trillion in assets. This underlines the important role performed by both banks and non-bank financial institutions in extending credit to businesses.
Inclusion of Misleading Fields in RoD Format:
The suggestion to include a "Type of Debt: Financial/Operational" field in the RoD format is ill-advised because it would not bind the NCLT or Resolution Professional. Instead, the RoD format should include elements for capturing the date and kind of papers for debt acknowledgment and default, as well as determining whether a creditor is a Scheduled Commercial Bank based on RBI data for more accuracy and trustworthiness.
For example, the NCLT admitted 4,541 corporate bankruptcy proceedings as of December 2022, with financial creditors involved in 3,008 cases (66.2%) and operational creditors involved in 1,483 instances (32.7%). This emphasizes the necessity of appropriately reflecting the kind of debt in the RoD format to avoid confusion and delays in the insolvency proceedings.
Conclusion:
The proposed amendments to the IBBI (Information Utilities) Regulations, 2017, represent a significant step towards strengthening the IBC ecosystem in India. These amendments aim to enhance the effectiveness and credibility of the Record of Default issued by Information Utilities, facilitating faster insolvency resolution for companies and LLPs. Re-evaluating provisions and incorporating a graded approach for debtor intimation will ensure a robust regulatory framework.
