Explained: Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019

Reading time: 6-8 minutes.

The Union Cabinet recently approved various amendments to the Insolvency and Bankruptcy Code (IBC) during its recent meeting on 11th December, 2019; these have been brought about through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.

The main aim of the amendments is to remove hiccups arising during the insolvency resolution process and make it all the more smoother in order to achieve the objective of the Code.

The amendments also seek to make it convenient to do business; the changes have been brought about to help with investment, especially in those sectors which are currently facing trouble, as well as to protect all the corporate debtors while additionally also preventing bankruptcy proceedings filed out of malice or incomplete information.

The amendments approved by the cabinet mainly seek to reconstitute sections 5(12), 5(15), 7, 11, 14, 16(1), 21(2), 23(1), 29A, 227, 239, 240, and insert new section 32A in the Insolvency and Bankruptcy Code, 2016.

These amendments will basically seek to redress bottlenecks, align the Corporate Insolvency Resolution Process (CIRP) while also providing security to last mile funding to inject and promote investments in financially insecure sectors.

Background in brief: Why is the change being made?

The Insolvency and Bankruptcy Code, 2016 (Code) is one of the most essential steps taken by the Government in order to deal with the manifold increase in the level of distressed debts occurring in India.

This Code provides for a time-bound insolvency resolution process for delinquent corporate debtors and at the same time replaces it with a creditor-in-possession model in which a committee of creditors (CoC) is set up to take decisions regarding the operations of the corporate debtor, which also includes evaluating prospective resolution plans for resolving the corporate debtor’s account.

This Code was an exceptional step towards resolution of stressed assets. However, particular exigent inconsistencies and gaps became glaringly evident when several legal proceedings were initiated with corporate insolvency resolution processes (CIRP), making it all the more necessary to furnish amendments to bridge these gaps.

The amendment was also urgent and the need of the hour in light of the fact that there have been various judicial decisions as well as cases, pending and ongoing, which are being viewed as antithetical to the Code’s enshrined objective of protecting the creditors and debtors.

To mainly address some of these issues, the cabinet passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 which, when approved by the President, will become effective from such date that the Central Government may notify and will hopefully bridge the gap between the discrepancies.

Salient features

  • This amendment is broadly being brought about to the Insolvency and Bankruptcy Code (IBC) to secure resolution applicants from criminal proceedings against offences that may have been committees by previous managements or promoters by insertion of the new Section 32A, which is one of its major features. It will “ring-fence” victorious bidders from any offences committed by the management prior to them while providing speedy and assured resolution mechanism to reassure buyers of any stressed assets which are involved.
  • It will also put in place additional thresholds for financial creditors being represented by authorized representatives to tackle frivolous initiation of the resolution process, thereby putting in place a secure mechanism.
  • It also takes care that the base of a corporate debtor’s business will not be threatened by frivolous issues and can continue to be hassle free by keeping licenses, permits, concessions, clearances, etc. updated and ensuring that these can neither be terminated or suspended, nor their renewal denied during the moratorium period.
  • This amendment will also prevent government agencies from attaching the assets of an insolvent debtor who is engaged in the bankruptcy resolution process for any prior offences, which in turn, will make the stressed asset more favorable for potential buyers. These features have been included to help companies such as Bhushan Power, REI Agro and Rotomac Global and their like which are undergoing the process of insolvency resolution.
  • This amendment also provide that a financial entity, which is under the regulation of a financial sector, will no longer be considered a related party to the corporate debtor just because it had acquired shareholding through a conversion of debt into equity or instruments convertible into equity shares. This change would ensure that they are not barred from resolution process because of such a relation.
  • The Bill also aims to amend the Code to provide some minimum thresholds for particular strata of financial creditors to set off the insolvency resolution process.  With regard to real estate projects, if an allottee (person to whom a plot, apartment, or building has been allotted to or sold) wants to initiate a resolution proceeding, the application should be filed jointly by at least 100 allottees of the same real estate project or 10% of the total allottees under that project, whichever is less.

Critical analysis

  • Under the original Code, if the insolvency resolution process (IRP) is not appointed in the order admitting application under section 7, 9 or 10, the insolvency commencement date shall be the date on which such IRP is appointed.

The  second amendment removes this clause and goes back to the start, to ensure that CIRP shall be taken to begin from the date of admission and not from date of appointment of IRP, in case the two differ.

  • While Section 11 of the Code does not categorically stop a corporate debtor from initiating insolvency against another, there were some discrepancies wherein this right of the corporate debtor tended to be denied by the Adjudicating Authority/ Appellate Authority. In order to establish the particular objective and to remove the anomaly arising regarding the validity of an application of a corporate debtor against another corporate debtor, this Amendment Bill provides the said intent
  • In order to provide ease of doing business and make sure that a corporate debtor is able to hold his status even after commencement of CIRP, the Amendment Bill provides for protection of the corporate debtor from suspension and/ or termination of its licenses/ permits/ concession, in cases where such suspension or termination takes place just because of initiation of insolvency proceedings. This comes with a condition that the corporate debtor should have made no defaults in payment for such benefits during the moratorium period
  • This amendment completely removes the liability of a corporate debtor with respect to any offences committed prior to the commencement of CIRP, subject to certain conditions.
  • Under the said amendment, the Central Government is empowered to make certain rules with regard to the changes occurring in the Bill; the Central Government will, by way of rules, prescribe the transactions, on completion of which the financial creditor will not be treated as related party of corporate debtor.

Conclusion

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 continues to make great strides in the legislative arena to deal with issues that keep cropping up in relation to stressed companies or those undergoing resolution proceedings.

By providing means to identify last mile funding cases as interim finance, the Amendment helps to rehabilitate stressed entities in a regulated manner while safeguarding interests of both the sides. Further, by increasing the scope of moratorium, the Amendment protects the sanctity of the rescue operations as envisaged by the IBC.

Separately, the immunity granted in terms of various provisions enshrined shall act as a facilitator for cleaner acquisitions, thereby incentivizing higher bids and promoting an investor-friendly regime.

Author: Akanksha Batra from Symbiosis Law School, Pune

Editor: Ismat Hena from Faculty of Law, Jamia Millia Islamia.

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