Rethinking IBC - Implications of Auction and Monitoring Committee Amendments

Putul Mehta*

The Insolvency and Bankruptcy Code, 2016, (“IBC”) being a specialized legislation, is considered to be crisp and self-explanatory. The legislature has also ensured that with timely interventions, the insolvency framework remains relevant to the evolving market landscape. While this holds true, with the proposed amendments in the auction process and the constitution of the Monitoring Committee, there are a few crucial implications that cannot be ignored.

The recent discussion papers posted on the IBBI’s database propose amendments to the liquidation process under the Insolvency and Bankruptcy Board of  India (Liquidation Process) Regulations, 2016 to improve the auction process. Additionally, the Discussion Paper on Monitoring Committee under CIRP dated 19th November 2024, suggests that while the current framework under Regulation 38 of the CIRP Regulations 2016 provides certain basic recognition to monitoring committees, the proposed amendments aim to make their constitution mandatory for implementation of all resolution plans.

These amendments carry severe implications and this article aims to analyze the impact of implementing the said proposals and also suggests alternative modifications to the existing framework.

Auction Framework

Regulation 33 of the IBBI (Liquidation) Regulations, 2016 addresses the mode of selling assets of the corporate debtor and states that the liquidator shall ordinarily do so through an auction in the manner provided under Schedule I of the Regulations. The Schedule stipulates various responsibilities of the liquidator while conducting due diligence of all the prospective bidders. This includes verification of KYC documents, assessment of the assets and compliance with section 29A of the Code.

After conducting the above-mentioned preliminary steps, the liquidator announces the highest bidder of the auction as the successful bidder. However, as per the proposed amendments, the liquidator may reject the highest bid if it does not seem to maximize the realization. The Discussion Paper proposes to allow the bidders to submit an eligibility affidavit under Section 29A. If a bidder submits a fraudulent affidavit, it will lead to severe consequences such as losing participation rights in the auction and forfeiture of their Earnest Money Deposit (EMD). This might deter non-serious participants and thus ensure bidder diligence.

To put a safeguard against any potential misuse, the liquidator is required to consult the Stakeholders Consultation Committee (SCC) before opting for the EMD forfeiture. This mandatory consultation with the SCC aims to ensure transparency, in case the liquidator decides to reject the highest bid above the reserve price.

However, this makes the matters complex. It is argued that the proposed auction process is fundamentally flawed due to two reasons. First, it provides the liquidator with excessive discretion in determining bidder eligibility under Section 29A, without establishing a clear and objective criterion. With such a wide discretion for the liquidator to act in the “best interests of the creditors”, he has an inexhaustive scope to decide what he considers to be in their best interest. While the consultation with SCC may be considered a safeguard on the face of it, it becomes a mere procedural formality rather than a meaningful check when the regulations fail to define what constitutes a valid ground for a bidder’s rejection.

For instance, if a transparent bidding process yields a Rs.100 Crore offer, the liquidator could unilaterally reject it in anticipation that a future round of auctions could raise a higher bid. Such speculative cancellations of auctions contravene the Supreme Court’s decision in Eva Agro Feeds Pvt. Ltd. v. Punjab National Bank & Anr., which prohibits terminating auctions on mere “anticipation” of better valuations without empirical justifications. This discretion could defeat the IBC’s main goal, that is, ensuring fair auctions to get the best values for the corporate debtor.

Second, and more critically, there is no communication channel between the bidder and the SCC. The proposal completely lacks a grievance redressal mechanism. This means that even with the reasons in writing, the bidders will have no means to challenge the said rejection and they will end up losing their EMD regardless of the grounds. This unilateral approach undermines principles of natural justice, creating a system ripe for arbitrary decision-making. This could prevent legitimate bidders from coming forward and taking on this position.

An alternative model could be to lay down an objective criterion for bid rejection, thereby creating a comprehensive framework balancing financial prudence with procedural fairness. The model could center on the following dimensions -

1. Source of Funds – This would mandatorily entail a standardized due diligence checklist conducted by the Liquidator and validated by IBBI-appointed auditors, to trace fund origins and exclude illicit money or connected parties.

2. Value Maximization - Bids lacking basic structural approaches for greater monetary resources, could be objectively considered for rejection.

3. Stakeholder Impact - A documented assessment could be conducted concurrently, where creditors, employees, and other SCC members analyze the implications of accepting or rejecting a particular bid.

4. Grievance Redressal – In case the reasons provided by the liquidator for the rejection of a seemingly appropriate bid stand as unsatisfactory, the said bidder must be provided a channel with the SCC to discuss the legitimacy of the said grounds, before they undergo forfeiture of their EMD and lose their participation rights. This will be a holistic and transparent procedure, which may be conducted separately after the declaration of the rejection, or simultaneously during the assessment of the bid with the SCC members.

   
   

This approach converts bid rejection from an arbitrary to a transparent, legally defensible process.

Monitoring Committee

Now coming to the second concern at hand, the Discussion Paper on Monitoring Committee under CIRP proposes to make a mandatory provision for the constitution of a Monitoring Committee. Presently, where such a committee is considered necessary, the Committee of Creditors (CoC) may, while approving the resolution plan, decide to constitute it with the resolution professional or propose another insolvency professional, or any other person as its member. The paper proposes to make this constitution mandatory. They also stipulate that where the professional is proposed to be part of the monitoring committee, their monthly fee shall not exceed the monthly fee received during the Corporate Insolvency Resolution Process (CIRP).

The proposal comes in consonance with the Supreme Court’s observation in the matter of State Bank of India & Ors v. The Consortium, where the Hon’ble Court suggested that the IBC should be amended to include a statutory provision for forming a Monitoring Committee once a resolution plan is approved. This was emphasized since at the time, it was up to the Adjudicating Authority to order the constitution of a Monitoring Committee.  

While the paper introduces several provisions under Regulation 38, the main focus of this article would center around the impact of clause 4(vi), which reads as under -

“(vi) The successful resolution applicant shall bear the expenses of the monitoring committee. Provided that the monthly fee payable to the insolvency professional, acting as the chairperson of the monitoring committee shall not exceed the monthly fee received by resolution professional during the corporate insolvency resolution process.”

This proposal particularly compromises the incentive as is reasonably required for a Resolution Professional. The proposal obliges the Professional to carefully monitor complex resolution plans while failing to provide any financial or performance-based incentives for them to do the same. Though it is the successful Resolution Applicant who will bear the direct expenses of the Monitoring Committee, restricting the monthly fee of the Professional fails to consider the extensive scope of work and additional challenges posed at the stage of effective implementation of a resolution plan.

For instance, if a Professional monitors the implementation of a resolution plan for a manufacturing company, he will need to manage stakeholder communications, ensure regulatory compliance and oversee asset transfers. Despite the increased scope of work, their monthly fee remains capped at the amount received during the CIRP. This is akin to a lawyer handling a high-stakes merger but being paid the same fee as for a simple contract review. The capped fee structure fails to account for additional complexities and time required, potentially leading to resource constraints and compromised quality of work. This potentially defeats the purpose of having a mandatory Monitoring Committee in the first place, which is to ensure efficient implementation of resolution plans. This raises the inevitable question of whether this will prompt experienced professionals to inevitably withdraw from such positions.

Therefore, considering these consequences, the following modifications or additions can be made to make the proposal more favorable towards the Resolution Professional –

1. Enhanced Support Mechanisms – Providing Resolution Professionals with additional resources, such as support staff or specialized advisors, possibly facilitated through Insolvency Professional Entities (IPEs). While IBC currently lacks explicit mention of partnerships with IPEs for monitoring purposes, it does recognize their role in supporting Insolvency Professionals. This could be a basis for facilitating access to additional resources.

2. Proportional Remuneration Adjustment – A three-tier system for Resolution Professionals could be introduced, with Tier-1 as the present default cap and Tiers 2 and 3 could be adjusted by the IBBI based on factors like the size and scale of business, business sector complexity, and the nature of the corporate debtor company. The IBBI could also set additional guidelines, for when higher fees is justified, ensuring fairness and consistency across cases.

   
   
   
   

Conclusion and Remarks

The purpose of having a comprehensive and holistic insolvency regime is crucial for economic stability and growth. While the IBBI’s attempt to strengthen the auction process and institutionalize monitoring committees is quite progressive, these proposals need more reflection. The mandatory constitution of the Monitoring Committee needs to be accompanied by corresponding procedural flexibility that would enable the Resolution Professional to ensure the effective implementation of the plan. Similarly, while the proposed changes to the auction process seek to enhance the process, the said powers of the liquidator must be influenced predominantly by objectivity and less by discretion.

*The author is a Fourth Year B.A.,LL.B. (Hons.) student at National Law University Odisha.