Regulation 36A(1A): Improving Efficiency or Compromising Revival?

[Amitesh and Pritish are students at West Bengal National Institute of Juridical Sciences.]

Recently, the Insolvency and Bankruptcy Board of India (IBBI) amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016. With this amendment, Regulation 36B(6A) has been replaced with Regulation 36A(1A).

Regulation 36A(1A) allows the resolution professional (RP) to invite expressions of interest (EOI) from prospective resolution applicants (RA) for resolution of the corporate debtor (CD) as a whole, for the sale of one or more specific assets of the corporate debtor, or for both options simultaneously. The introduction of Regulation 36A(1A), along with the simultaneous omission of the earlier Regulation 36B(6A), is part of a fundamental policy shift. The erstwhile Regulation 36B(6A) mandated a sequential approach, allowing the RP,  to invite plans for individual assets only if no resolution plans were received for the CD as a whole. On the contrary, the current 36A(1A) enables the committee of creditors (CoC) to pursue bids for the entire entity, its segments, or both concurrently at a very initial stage. This amendment signals a move towards tailored resolution strategies that prioritize economic outcomes and creditor interests, even if it deviates from a purely holistic revival model.

Through this blog, the authors will seek to highlight the implications and practical loopholes of the amendment, which has possibly blurred the line between corporate insolvency resolution process (CIRP) and liquidation. 

Concerns with Asset Wise Resolution under Regulation 39A(1A)

Determination of going concern 

Under Regulation 36A(1A), EOI may be sought for the submission of resolution plans for the CD as a whole, or for the sale of one or more assets of the CD, or for both. The underlying assumption in this provision is that the sale of asset as a whole or for one or more assets of the CD or both should provide for maintaining the asset as a going concern. Statutorily, any resolution plan should provide for the insolvency resolution as a going concern. This assumption is further strengthened by reference to a notice issued by the Ministry of Corporate Affairs on 18 January 2023 which commenting on the erstwhile Regulation 36B(6A) of the IBBI regulations which also provided for asset wise resolution of the CD, clarified that at least one resolution plan should provide for insolvency resolution of the CD as a going concern.

Thus, resolution applications under Regulation 36A(1A) also have to provide for maintaining the asset(s) of the CD as a going concern. However, the IBC framework does not provide an objective criterion for what would qualify as a going concern. In its report dated 26 March 2018, the Insolvency Law Committee interpreted the expression “as a going concern” to suggest that the CD should remain operational in a manner akin to its state prior to the commencement of the corporate insolvency resolution. Broadly understood, a sale of the CD as a going concern entails the transfer of both assets and liabilities, which are essential to the functioning of the entity, with the consideration being attributed to the CD in its entirety. Courts have highlighted that resolution as a going concern involves maintaining the organizational integrity, including employees and infrastructure, to ensure a viable and effective resolution. These are all subjective terms and cannot be implemented according to their dictionary meanings, especially in a situation where there is asset-wise resolution of the CD. Thus, while there are subjective ideas of what would qualify as maintaining the asset as a going concern, there do not exist objective factors on which a resolution plan may be tested in. It is the author’s contention that this presents as a loophole, which may work against the employees and operational creditors of the CD. 

Moreover, a resolution under Regulation 36A(1A) may see multiple resolution plans for different sets of assets. Under this provision, the RP, with the blessing of the CoC, decide to club assets together to meet the interests of the prospective RA. There is no guideline as to how such assets have to be clubbed together to ensure that the asset(s) are maintained as a going concern. This situation is especially relevant in business where the functionality of one asset is dependent on the functionality of the other asset. 

Such situations leave open the option for the RP and the CoC to accept a resolution plan, which, even though prima facie provides for the resolution of the asset as a going concern, would see a different functionality or organizational structure. Such situations may arise when the successful RA may intend a completely different purpose for the asset of the CD. Such a practice would not be illegal as long as the asset continues to function. The CoC in this situation, comprising of financial creditors, would see their interests served even if such assets as long as they are able to recover a substantial amount of their debt from the resolution of the asset. 

However, in these situations, it will be the stakeholders not represented in the CoC who will be disadvantaged. Such a resolution would be unfair to stakeholders like employees and operational creditors. The successful RA will not require the older employees if it uses the asset for a different business operation. The same will be the case for operational creditors who have maintained a long relationship with the CD; with a new business utility of such an asset, the operational creditor may not be able to provide services for such a business utility. Thus, the lack of a clear directive/guideline as to how the assets of the CD must function to maintain it as a going concern would result in an unfair resolution of the CD.

Distribution of liabilities

There is further lack of clarity as to how the assets and liabilities of the CD will be divided into clusters or for resolution. A key issue that comes up is that when breaking down the assets into separate components for the purpose of resolution under this regulation, is how the liabilities of the CD, which apply as a whole, will be divided.  The liabilities of the CD may not be specific to an asset group but may apply to the CD as a whole. In this situation, the RP will have to work with the CoC and the RA to proportionately distribute the liabilities of the CD among different clusters of assets. With a lack of guidelines from the government authorities for how such distribution of liabilities has to be carried out, this may become a contentious and difficult process. The absence of government guidelines leaves the RP and the CoC to navigate these issues on a case-by-case basis. This could lead to inconsistent approaches across different CIRP, creating uncertainty and potentially undermining the purpose of Regulation 36B(1A) to facilitate a faster and more efficient resolution. The lack of a government advisory may also open the door to legal challenges from dissenting creditors, who may argue that the allocation of liabilities was arbitrary or prejudicial to their interests. Such challenges could further delay the resolution process. A more robust regulatory framework, perhaps including a tiered approach for liability allocation or a mechanism for independent third-party valuation, would provide clarity and predictability, ultimately strengthening the effectiveness of the Regulation.

Partial resolution and partial liquidation?

Another issue arising in the application of Regulation 36A(1A) is that there is no clarity in cases where adequate resolution plans are submitted only for certain assets of the CD. As per this regulation, a resolution plan may be submitted only for certain assets of the CD. There can be a situation where, although adequate resolution plans have been received for some assets, no adequate resolution plan has been received for a substantial number of assets of the CD. Here, though the limited assets would successfully be resolved, it is uncertain what might be done with the rest of the assets of the CD. The IBC system does not contemplate a scenario in which the resolution and liquidation of the asset are concurrent. Nor does it contemplate a scenario in which remaining assets are sold off via liquidation after some of the company assets have been resolved successfully.

Conclusion

While the regulation has the potential to facilitate faster and more value-maximizing outcomes, the lack of statutory guidance and procedural safeguards could inadvertently undermine the IBC’s foundational objectives. One of the biggest worries among them is the vagueness in defining what a "going concern" is, a shortcoming that jeopardizes the interests of weaker stakeholders like employees and operating creditors.

The lack of clear guidelines for the distribution of liability makes the process open to arbitrariness and difficult in the long run. The danger of partial settlement in the wake of partial liquidation only adds to the regulatory load, blurring lines once thought unambiguous in the IBC landscape.

Further, statutory clarification or regulatory guidance would help to ensure that expediency does not come at the cost of fairness or legal certainty. Until such measures are enacted, the new regulation will continue to straddle a fine line between innovation and instability within the corporate insolvency regime.