Strengthening the IBC Ecosystem: A Critical Analysis of the Proposed Amendments to the IBBI (Information Utilities) Regulations
The Insolvency and Bankruptcy Board of India (IBBI) recently published a discussion paper titled “Strengthening the process of issuance of record of default by Information Utility” on May 10, 2024.
The paper proposes amendments to the IBBI (Information Utilities) Regulations, 2017 to enhance the effectiveness and credibility of the Record of Default (RoD) issued by Information Utilities (IUs). The key proposals are:
- Provide sufficient time of 7 days (instead of 3) to the debtor to respond after delivery of the information of default by the IU. This will give a fair opportunity to the approximately 16.80 lakh active companies and 3.26 lakh LLPs in India to authenticate the default information.
- Restrict delivery of information of default to debtor-provided email IDs 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 robust.
- Mandate creditors (except scheduled banks) to upload proof of debt/security, default and latest debt acknowledgment while submitting information to IUs in Form C along with a declaration of genuineness. This will allow IUs to verify the debt and default before issuing the RoD.
- IUs to properly verify debtor email ID, proof of debt/security, latest debt acknowledgment, and proof of default before issuing the RoD to establish it as conclusive proof.
- Make it mandatory for debtors to upload proof of dispute, if they dispute the default information, to deter frivolous disputes that delay insolvency proceedings for a large number of companies/LLPs.
- In case of scheduled banks, if debtor disputes default but latest debt acknowledgment documents are available with IU, the RoD should still be issued as ‘authenticated’. For partial disputes, RoD should be issued as ‘authenticated’ for the undisputed amount.
- Incorporate additional details in the RoD format such as type of debt, date of last repayment, default notice details etc. to facilitate efficient decision-making by the Adjudicating Authority during admission of insolvency applications.
These amendments will provide reasonable opportunity and flexibility to the approximately 16.80 lakh active companies and 3.26 lakh LLPs in India to authenticate the default information, while still keeping the process time-bound.
While the proposals are well-intentioned and may help streamline the insolvency resolution process, there are some areas of concern that merit deeper examination and reconsideration.
Key areas of concern:
(1) Intimating Debtors about Defaults:
Firstly, regarding intimating RoD to debtors, a new approach is needed. For example, Regulation 21(2)(c) of the IBBI (Information Utilities) Regulations needs reconsideration. At present it provides that intimation of RoD or reminders to debtors be made “by hand, post or electronic means at the postal or e-mail address of the debtor”.
This itself needs modification to state that the intimation to debtor shall be at first by e-mail and text messages such as SMS / WhatsApp or other electronic mode.
And only after failure of practical and efficient approach to rely primarily on electronic modes of communication with debtors, intimating by post and, failing which by newspaper advertisements may be considered.
Only in case of bounced or unavailable debtor emails, the IU should be required to send a physical notice to the debtor’s registered office address by speed post or registered post. If the physical notice is also returned undelivered, only then the IU should proceed with a public notice by way of newspaper advertisement as a last resort. This graded and hybrid approach leveraging digital communication will be faster, cheaper and more effective in reaching out to a large number of debtors compared to physical notices or newspaper publications in the first instance.
(2) Differential Treatment of Banks and Other Creditors:
Secondly, the rationale for treating banks differently from other creditors in terms of submitting proof of debt, default and latest acknowledgment is problematic and discriminatory. It seems to suggest that bank records are more reliable than those of other creditors simply by virtue of being banks. This disregards the fact that under the Companies Act, 2013, Income Tax Act, 1961 and other laws, financial statements and records of all companies/LLPs above specified thresholds have to be audited by independent chartered accountants. Audited financial statements of companies/LLPs, whether maintained by banks or other creditors, should be considered equally authentic for submitting default information to IUs.
The mention of the Bankers’ Books Evidence Act, 1891 for this distinction also seems misplaced, as this century-old law deals only with the evidentiary value of bank records in legal proceedings and not their inherent reliability compared to records of other creditors. Many NBFCs, HFCs and other financial creditors also extend large loans to companies and maintain detailed records subject to RBI regulations and audit. Treating them differently from banks for submitting default information would create an uneven playing field in the IBC process and undermine the very purpose of IUs as repositories of authenticated financial information.
Therefore, the IBBI should mandate a uniform and non-discriminatory process for all creditors to submit proofs of debt, default and acknowledgment based on objective criteria like loan value, type of debt etc. rather than the creditor’s identity as a bank or non-bank. However, a higher threshold of proof may be prescribed for debts above a certain value, say INR 5 crores.
According to the Reserve Bank of India, as of March 2023, there were 12 public sector banks and 22 private sector banks in India, collectively holding over INR 180 trillion in assets. In comparison, there were 93 NBFCs with asset sizes greater than INR 5,000 crore, holding approximately INR 33 trillion in assets. This highlights the significant role played by both banks and non-bank financial institutions in extending credit to businesses.
(3) Inclusion of Misleading Fields in RoD Format:
Thirdly, the proposal to include a “Type of Debt: Financial/Operational” field in the RoD format seems ill-advised, as classification of debt is a matter of adjudication by the NCLT under the IBC – financial debt under Section 7 and operational debt under Section 9. Any such classification provided by the creditor in the RoD would not be binding on the NCLT or the Resolution Professional. It may create confusion and lead to disputes if the creditor’s classification is contested by other stakeholders. If this field is still included, it should come with a clear disclaimer about its non-binding nature and the overriding authority of the NCLT to determine the nature of debt as per the IBC.
Instead, the RoD format should include fields capturing the date and nature of documents relied on for debt acknowledgment and default, as these objective facts will be more relevant for verification by IUs and determination by the NCLT. Similarly, rather than relying on creditors’ declaration, the IUs themselves should verify if a creditor is a Scheduled Commercial Bank based on RBI records. This will ensure more accuracy and credibility of the information in the RoDs.
For instance, in the 4,541 corporate insolvency cases admitted by the NCLT as of December 2022, financial creditors were involved in 3,008 cases (66.2%), while operational creditors were involved in 1,483 cases (32.7%). This underscores the importance of accurately capturing the nature of debt in the RoD format to avoid confusion and delays in the insolvency process.
Conclusion: The proposed amendments to the IBBI (Information Utilities) Regulations, 2017, as outlined in the discussion paper dated May 10, 2024, represent a significant step towards strengthening the IBC ecosystem in India. By enhancing the effectiveness and credibility of the Record of Default issued by Information Utilities, these amendments can facilitate faster and more conclusive identification of defaults, thereby catalysing time-bound insolvency resolution for the vast number of companies and LLPs in the country.
However, to ensure a more equitable, efficient, and accurate process, certain provisions need to be re-evaluated and refined. This includes adopting a graded and hybrid approach for debtor intimation, mandating uniform proof requirements for all creditors based on objective criteria, and capturing more relevant and objective information in the RoD format while avoiding misleading classifications.
By incorporating these suggestions, the IBBI can create a robust regulatory framework that enables Information Utilities to become a trusted and integral pillar of the IBC ecosystem. This, in turn, will contribute to the overall goal of promoting entrepreneurship, credit availability, and economic growth in India.
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