Creditor Paybacks: The Case For Compulsory Monitoring Committees Under Insolvency

When one of the most notable carriers in the aviation industry went down earlier this month, the highest court of the land was witness to an ‘eye opener’ as to how insolvency cases are handled in this country.

The Jet Airways saga forced the court to issue a host of suggestions for dealing with the lacunas in the system. One such suggestion pertained to the issue of a smooth handover of the insolvent company to its new owners.

To make good on the court’s counsel, the Insolvency and Bankruptcy Board of India has, this week, come out with a proposal to mandate the constitution of a monitoring committee for implementation of all resolution plans.

Although there is a provision pertaining to monitoring committees in the existing framework, it is merely discretionary in nature. The IBBI has proposed to make it compulsory along with granting the creditors committee to take the final decision on its constitution and composition, as part of the resolution plan itself.

Acquirers often discount their bids to account for potential challenges arising during the implementation phase. These challenges, such as delays in handover of business and management, compliance gaps, or unresolved legal issues, directly impact the payback to creditors, Chand said.

The proposal seeks to benefit all stakeholders by providing structured oversight, expedited resolution plan implementation, and preserving asset value, which might otherwise erode due to delays, stated Anuj Shah, counsel at DMD Advocates.

IBBI has proposed that the monitoring committee shall include members who are direct stakeholders, and to ensure equitable representation of interests, the committee must comprise nominations from the committee of creditors (CoC) and an equal number of nominees from the new owners. 

It has been suggested that these committees must give the NCLTs and the IBBI progress reports on the implementation of the plan every three months and they must approach the tribunals if everything doesn’t go according to the plan.

The proposed framework allows the facility to exclude or add members as needed. It is also recommended that the new acquirers take care of the expenditures of the monitoring committee to ensure operational efficiency and accountability.

As of now, the expenses are borne out of funds of the company in majority of the cases and hence, there is no incentive for the acquirers to expedite implementation, said Madhav Kanoria, partner at Cyril Amarchand Mangaldas.

The new proposal will ensure that the expenses will not be deducted from the financial outlay for the creditors while simultaneously incentivising the successful resolution applicant to expeditiously implement the resolution plans, Kanoria remarked.

Shah said that a structured escalation process for delays should be put in place, with time bound interventions from the NCLTs to mitigate prolonged litigation during the implementation stage.