India: Bankruptcy Code: Ghost Of Retrospectivity Returns To Haunt

The Insolvency and Bankruptcy Code, 2016 ("Bankruptcy Code") has proved to be a game-changer for corporate India and has witnessed several key amendments sparked by inputs received from market participants. Being a new enactment, loopholes are bound to exist and are being quickly plugged in an effort to ensure the sanctity of the process. In an attempt to further address the increasing concerns, including with respect to the much-talked-about eligibility for submission of resolution plans under the Bankruptcy Code, the President on November 23, 2017 promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 ("Ordinance"), which has come into force. The Ordinance, amongst other things, attempts to put safeguards to prevent unscrupulous persons from misusing or vitiating provisions of the Bankruptcy Code and is aimed to keep out wilful defaulters associated with non-performing assets from submitting resolution plans. Our analysis of the amendments are as under:

Amendment and Analysis

1) Expansion of whom the Bankruptcy Code applies to:

Amendment

Analysis

Bankruptcy Code to also apply to (i) personal guarantors to corporate debtors; (ii) partnership firms and proprietorship firms; and (iii) individuals (other than personal guarantors).

  • With respect to inclusion of personal guarantors of corporate debtors, though the Allahabad High Court in a recent case1 had the occasion to analyse and opine on the initiation of insolvency process against a personal guarantor, personal guarantors were not expressly covered within the process contemplated under the Bankruptcy Code. The Ordinance now brings the much needed clarity in relation to the applicability of the Bankruptcy Code to personal guarantors, who now fall within its ambit. The question of application qua personal guarantors to corporate debtors will require some additional clarity including the triggers.
  • The rationale for including applicability of Bankruptcy Code to partnership and individuals is possibly also to facilitate commencement of Part III of Bankruptcy Code related to insolvency and bankruptcy of individuals.
  • Inclusion of proprietorship firms is a welcome step. Since most medium and small enterprises in India work on a proprietorship model, it was essential to streamline the mechanism for insolvency and bankruptcy of proprietorship firms. While the amount of loan availed by such proprietorship is comparatively less, the number of proprietorship firms availing loans is significantly high.2 Further, since such proprietorship firms do not have a primary legislation governing compliances, the chances of default in repayment of loan is higher. However, considering the nature of restructuring required for proprietorship is different from the restructuring required for a company, there may be need for carve outs to the existing code for such proprietorship firms in terms of costs, time and keeping in mind the business environment they operate in and such carve outs may be focused more on consultation approach. It will also have to be seen whether the insolvency and bankruptcy proceedings for proprietorship firms will be carried on under Part III of the Bankruptcy Code or will new provisions be inserted for the purposes of such proceedings.

2) Number of applicants:

Amendment

Analysis

The Resolution Applicant means a person who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of Section 25.

  • The Ordinance has amended the definition of a 'resolution applicant'. The Bankruptcy Code now explicitly allows persons to either singly or jointly submit a resolution plan.
  • At the outset, this change will prove beneficial to persons who wish to jointly present a resolution plan pursuant to the an invitation in accordance with Section 25(2)(h) of the Bankruptcy Code and will facilitate acquisition of large stressed assets.
  • There are existing implications under the Competition Act, 2002 in cases where due to the size/value of an undertaking (either the acquirer or the corporate debtor), approval from the Competition Commission of India may be required have still not been addressed and in fact, given the ability of persons to jointly submit resolution plans, may only get further exasperated. While the erstwhile Sick Industrial Companies (Special Provisions) Act, 1985 had specific exemptions to this effect, similar provisions may also need to be included to the Bankruptcy Code. This may see the need for additional amendments.
 

3) Need for invitation and imposition of conditions for the resolution applicants to fulfil:

Amendment

Analysis

The resolution applicant is required to fulfil such criteria as may be determined by the resolution professional with the approval of the committee of creditors, depending upon the complexity and scale of operations of the business of the corporate debtor, and such other conditions as may be specified by the Board.

  • As a result of the Ordinance, the resolution professional is required to impose certain criteria for resolution applicants to fulfil, in order to enable them to receive an invitation to submit a resolution plan. Further, these criteria have to be imposed (i) with the prior approval of the committee of creditors; (ii) having regard to the complexity and scale of operations of the business of the corporate debtor; and (iii) as may be specified by the Insolvency and Bankruptcy Board of India ("IBBI");
  • The said amendment appears to be made in light of the recent debates related to the credibility, both financial and legal, of the resolution applicants. The market has recently been polarized with respect to the eligibility criteria of the bidders submitting resolution plans for taking over stressed assets.

4) Barring certain class of persons from submitting resolution plan:

Amendment

Analysis

The Ordinance mandates that certain classes of identified persons or any other person acting jointly with such person or the promoter or any person in management of such person from submitting the resolution plan.

 
  • Promoters of stressed companies have also expressed interest in submitting resolution plan for their own companies. In a bid to ensure that past track record of the resolution applicant is evaluated, IBBI had issued a notification amending the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 20163, which provided for details of the applicant of the plan such as identity, conviction for any offence, identification as a wilful defaulter, details of promoter etc. to be incorporated in the plan.

    1. The Ordinance now makes certain persons ineligible to submit resolution plans. A person shall be ineligible to submit a resolution plan if such person, or any person acting jointly with such person, or any person who is a promoter or in the management or control of such person is an undischarged solvent;
    2. has been identified as a wilful defaulter by the Reserve Bank of India ("RBI");
    3. whose account is classified as non-performing asset ("NPA") by the RBI and period of one year or more has lapsed from the date of such classification and who has failed to make payment of all overdue amounts with interest and charges relating to the NPA before submission of the resolution plan;
    4. has been convicted of any offence punishable with imprisonment for two years or more;
    5. has been disqualified to act as a director under Companies Act 2013;
    6. has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
    7. has indulged in preferential or undervalued or fraudulent transaction in respect of which an order has been made by the National Company Law Tribunal; or
    8. has executed an enforceable guarantee in favour of creditor, in respect of a corporate debtor under Insolvency resolution process or liquidation under the Code.

      Further, any 'connected person' in respect of persons mentioned above, shall also be barred from submitting resolution plan.

  • A connected person for the purposes of the Bankruptcy Code means:

    1. Any person who is promoter or in the management or control of the resolution applicant; or
    2. Any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or
    3. The holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii).
    4. Has been subject to any disability, corresponding to above provisions, under any law in a jurisdiction outside India.
  • The said amendment appears to be made in the light of the recent debates related to the credibility, both financial and legal, of the resolution applicants. The market has recently been polarized with respect to the eligibility criteria of the bidders submitting resolution plans for taking over stressed assets.
  • The said amendment imposes stringent limits and constraints on potential suitors who are able to submit a bid for stressed assets. On the face of it, a number of potential applicants would stand affected by this amendment and it would now be obligatory on resolution applicants to disclose all details about themselves and the persons acting jointly with them for submission of resolution plans.
  • The definition of 'connected person' may also result in unwarranted bar on certain financial investors'. Moreover, this amendment now affects and brings within its ambit persons who may have been affected by disabilities even in jurisdictions other than India.
  • Imposition of such limits, whilst arguably warranted, will certainly affect price discovery and will reduce the ability of the creditors of the company to be able to recover their debts.

5) Proviso on bar to committee of creditors to sell:

Amendment

Analysis

Proviso to existing Section 30 (dealing with submission of resolution plan) has been inserted pursuant to which the committee of creditors shall not approve a resolution plan submitted before the Ordinance, if the resolution applicant is ineligible under Section 29A and if no other resolution plan is available, the resolution professional to invite fresh plan.

  • Per the Ordinance, committee of creditors have been barred from approving a resolution plan, which is submitted before the commencement of the Ordinance, but which is submitted by a resolution applicant who is ineligible by virtue of amendments made by way of the Ordinance. The Ordinance thus has retrospective effect and shall be applicable on the resolution plans that are already submitted and under consideration.
  • While the intention may be to bring transparency and credibility to as many resolution plans as possible, such retrospective applicability may give grounds to applicants who have already submitted their resolution plans, to question the legality of the Ordinance before the Courts, thus resulting in further delay in the implementation of the resolution plan. This will further negatively affect the stringent timelines contemplated under the Bankruptcy Code.
 

6) Bar on sale to person who does not satisfy the 'resolution applicant' test:

Amendment

Analysis

Proviso to existing Section 35 (Powers and Duties of Liquidator) inserted that prohibits the sale of immovable property/movable property/actionable claim of the corporate debtor to any person not eligible to be a resolution applicant.

  • The liquidator is allowed to sell properties or actionable claims of a corporate debtor under insolvency to a person who is eligible to be a resolution applicant.
  • The amendment ensures that the liquidator also ensures that the satisfaction of the criteria for being eligible as a resolution applicant is met before sale of any property which belongs to corporate debtor is made under the Bankruptcy Code.

7) Punishment for contravention of the Bankruptcy Code:

Amendment

Analysis

Section 235A inserted to the Bankruptcy Code which provides that any contravention of the Bankruptcy Code or the rules or regulations for which no penalty or punishment has been prescribed shall be punishable with fine of not less than INR 100,000 but which may extend to INR 20,000,000.

  • The referenced amendment shall ensure that the violation of any of the provisions enacted by the Ordinance, for which no specific penalty stands imposed already, shall be punishable with fine. The quantum of the high fine shall act as a deterrent against any violation.

8) Further powers to IBBI:

Amendment

Analysis

The Ordinance amends the existing Section 240 (Power to Make Regulations) giving IBBI power for making regulations under Section 25(2)(h) and Section 30(4).

  • For the purposes of empowering IBBI for notifying any further regulations that may be needed to achieve the objective of the Ordinance, amendment has been to bring promulgation of regulations further to the newly inserted Section 25(2) and Section 30(4) within the scope of IBBI under Section 240.

Conclusion

While the Ordinance is designed to streamline the process of credible bidding by removing the backdoor entry of promoters (and connected persons), the impact of the Ordinance in ensuring effective sale of stressed assets is yet to be seen. Imposing such wide eligibility criteria as sought to be done by the Ordinance, will restrict the number of participants and may affect price discovery.

Impact on M&A

It will be interesting to see how promoters, who have defaulted due to factors beyond their control, especially in sectors like infrastructure (e.g. delay in obtaining approvals, litigations pertaining to land etc.), and now are barred from submitting resolution plans, choose to react to the Ordinance. Further, the ramifications of who is now rendered ineligible to participate may have unintended consequences and may bring within its fold financial investors.

One would expect parts of this Ordinance to be challenged by persons who fall under the just introduced Section 29A of the Bankruptcy Code, where those persons have already submitted resolutions plans prior to the Ordinance, which are under consideration. This may throw up its fair share of litigation at various Courts, which may effectively work to derail the ongoing time bound process under the Bankruptcy Code.

1 Sanjeev Shriya v. State Bank of India & others C. No. 30285 of 2017

2The Fourth All-India census of MSMEs published in 2011 reported a total of 36 million MSMEs

3 http://www.ibbi.gov.in/cirpregulation19.pdf, last accessed on November 24, 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Sahil Kanuga
Pratibha Jain
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions