The Insolvency and Bankruptcy Board of India (IBBI), has published a discussion paper asking how letters of credit (L/Cs) and bank guarantees (B/Gs) should be considered as claims in the corporate insolvency resolution process.

The insolvency regulator says there is some confusion regarding the treatment of live L/Cs and B/Gs in the resolution process and has asked for comments on the discussion paper to be submitted by 17 September.

Three scenarios

The paper contemplates and seeks comments on three scenarios in which live L/Cs and B/Gs could be considered as claims in the resolution process.

In the first scenario the paper considers an instance when the LC/BG was invoked by the beneficiary before the insolvency commencement date of the corporate debtor. The paper suggests it does become a claim against the corporate debtor on the day the insolvency commenced.

Late claims

Where the LC/BG remains live and uninvoked during insolvency resolution process, the paper suggests it may be considered a contingent liability and acted upon accordingly.

Finally, where the LC/BG is invoked by the beneficiary during the corporate insolvency resolution process, the paper says industry practice suggests it qualifies as a claim even when submitted after the 90-day period for claims submission has lapsed.

Additional discussion topics

The discussion paper also solicits comments on the code of conduct for committees of creditors in the corporate insolvency resolution process.

It also asks for comments on restrictions on requests for resolution plans under the so-called Swiss challenge mechanism, in which any third party could submit a resolution plan for a distressed company and the original applicant would have to either match an improved resolution plan or forfeit their application for the company.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.