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Finance Minister Nirmala Sitharaman introduced The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 (hereinafter referred to as ‘the Bill’) in Rajya Sabha on the 24th of July 2019 and within some days’ time, we saw the Bill receiving the President’s assent and becoming the 26th Act of the year 2019. This is the first amendment to the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘the IBC’ or ‘the Code’) which has not been brought about by way of an ordinance. The Bill was introduced to expediate the insolvency proceedings, ensure greater clarity and avoid any sort of interpretative ambiguities.
Why this amendment?
- Non-adherence to the timeline provided for completion of Corporate Insolvency Resolution Process (CIRP) i.e. within 180 or 270 days mainly due to intervening legal proceedings. As mentioned in the Statement of Objects and Reasons of the Bill, delay caused by extensive litigation hampers value maximisation of assets.
- Since the provision providing the Adjudicating Authority to initiate CIRP proceedings within 14 days of receiving a resolution application was directory and not mandatory, it has been seen that the NCLT has taken more than the stipulated 14 days’ time in considerable cases which adds up to the delay in admission of insolvency proceedings.
- Concerns were raised by various stakeholders that financial and operational creditors must be given a similar treatment and that discrimination amongst financial creditors on the basis of existing priorities or security interest is not permitted in a resolution plan. This was triggered when the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel judgment dated 4 July 2019 modified the resolution plan in a way to secure the same recovery rate for both, financial and operational creditors. Its operation was stayed by the Supreme Court of India later that month.
- The NCLAT has also held that since the Committee of Creditors (CoC) comprises of financial creditors only, they become interested parties and thus, can’t be made to determine the manner of distribution of proceeds of a resolution plan amongst the financial or operational creditors. The downside to this pronouncement can be seen through the case of Jaypee Infratech Limited, where majority of CoC comprised of homebuyers and the decision-making was hindered because of creditors not voting on resolutions.
The Act targets three broad issues:
First, it strengthens provisions related to time-limits in order to balance out the interests of all stakeholders. Second, it specifies the minimum pay-outs to operational creditors in any resolution plan since there was a need to ensure that all creditors are treated on an equal footing. Third, it brings clarity on the voting pattern in a way that it specifies the manner in which the authorised representative of a group of financial creditors (such as home-buyers) should vote.
What are these amendments?
- Explanation of ‘Resolution Plan’– Amendment to Section 5 of the Code clarified that a Resolution Plan may include provisions for the restricting of the corporate debtor, including by way of merger, amalgamation and demerger. This amendment provides statutory recognition to corporate reorganisation which would otherwise fall out of the scope of a ‘going concern’.
- Adjudicating Authority to record reasons of delay in writing– A proviso has been inserted to Section 7(4) stating that where the Adjudicating Authority is unable to ascertain the existence of default and hasn’t passed an order accepting or rejecting such resolution application within a time period of 14 days from the date of receiving the application, it shall record the reasons of delay in writing. This amendment is brought to ensure effective admission of resolution applications.
- Time bound completion of CIRP- Amendment to Section 12 has provided that the Corporate Insolvency Resolution Process, which earlier had to be completed in 180 or 270 days, will now have to be completed within 330 days from Insolvency Commencement date and this will include any extension as well as the time taken in legal proceedings with respect to such resolution process. Another proviso provides for pending CIRP proceedings which have already exceeded 330 days’ time period; for such proceedings will have to be completed within 90 days from August 6, 2019 i.e. the day when this Act came into effect.
- Authorised Representatives for Financial Creditors- To ensure effective participation of financial creditors in CoC proceedings, Section 25A of the Code is amended to provide that Authorised Representatives shall cast a vote on behalf of all the financial creditors he represents in concurrence with the decision of more than 50% of the financial creditors he represents, who have cast their vote. It is further provided that for a vote to be cast under Section 12A, it shall be done in accordance with the provisions of sub-section (3).
- Fair and equitable treatment of Operational Creditors– Amendment to Section 30 of the Code allows for payment of debts of Operational Creditors which equals to the liquidation value of their debt or the amount which they would’ve received had the amount to be distributed in accordance with the order of priority in Section 53(1) of the Code, whichever is higher. Also, an explanation is provided to clarify that any and all distribution shall be ‘fair and equitable’ to such creditors. This amendment also states that with regards to the Financial Creditors who do not vote in favour of the Resolution Plan, their payment shall not be less than the amount due to them under Section 53(1).
- Interest of Secured Creditors- Under Section 30(4), the priority and interest of the secured creditor is covered under Manner of Distribution.
- Dues of Governments and Local Authorities- Payment of dues owed to Central Government, any State Government or any Local Authority are now covered under Section 31 of the Code.Also, once a resolution plan is approved, it is binding on the Central Government, any State Government or any Local Authority like any other stakeholder in the resolution plan.
- Liquidation of Corporate Debtor by the CoC- At any time, between its constitution and the confirmation of Resolution Plan by the CoC and before the Information Memorandum is prepared, the Committee can decide to liquidate the Corporate Debtor under Section 33(2) of the Code.
- Power to make regulations– Under clause of Section 240 of the Code, the Board may make rules regarding the manner of making payment of insolvency resolution process costs with regards to all debts due instead of just repayment of debts of operational creditors.
This Act has been implemented to build confidence amongst creditors and the investor community. It is an effort to control and timely deal with the myriad of cases where huge debtors declare themselves bankrupt and call in for insolvency. One of the amendments is specifically targeted at the interests of a class of creditors i.e. homebuyers, keeping in mind the alarming increase in real estate scams. It is an effort to secure the interests of creditors, mainly secured creditors, and an initiative to restore the effectiveness of the IBC as an important legislation. This Act has been implemented to fill critical gaps in the corporate insolvency framework.
-This article is brought to you in collaboration with Trushita Mehra from Amity Law School, Delhi.