In the past few months, the Central Government and the Insolvency and Bankruptcy Board of India ('IBBI') have introduced several changes to the Insolvency and Bankruptcy Code, 2016 ('IBC') and the regulations issued thereunder. Some of the important changes introduced by the amendments have been discussed below.
1. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 ('Ordinance') (operative with effect from December 28, 2019)
Some of the key aspects of the Ordinance are summarized below:
i. 'Interim finance' under the IBC means any financial debt raised by the corporate debtor after insolvency commencement date. The Ordinance expands the scope of interim finance to any other debt that may be notified. No such notification has been made till date. However, it is expected that certain categories of last mile financing made available to distressed companies in the zone of insolvency may be notified as interim finance.
ii. The Ordinance clarifies that the effect of the approval of a resolution plan by the Adjudicating Authority ('AA') should result in: (i) the extinguishment of all liabilities of the corporate debtor existing at or pertaining to the period prior to the insolvency commencement date; and (ii) no action being taken against the property of the corporate debtor, in relation to the offences committed in the period prior to the insolvency commencement date. However this immunity is only available in cases where the resolution plan specifically provides for change in the management or control of the corporate debtor to a person not being a promoter managing or controlling the corporate debtor/ any related party or a person against whom a complaint or report has been filed before the relevant authority in relation to the aforementioned offence.
iii. The Ordinance has prescribed minimum thresholds for filing of the application in certain cases i.e., in terms of number: (a) in case of homebuyers/ allottees, at least 100 homebuyers/ allottees under the same project or at least 10% of the total number of such allottees whichever is less; and (b) in case of a class of creditors identified under Section 21(6A)(a) and Section 21(6A)(b) of the IBC, at least 100 creditors of such class or at least 10% of the total number of creditors in such class, whichever is less.
iv. The Ordinance introduces a second set of essential services other than the services specifically listed out in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations'). If the resolution professional is of the opinion that the supply of any goods or services is critical to run the operations of the corporate debtor as a going concern, then such services will not be terminated, suspended or interrupted during the period of moratorium subject to the condition that there is no default in the payment of fees pertaining to the period of moratorium.
v. The Ordinance also provides protection against automatic termination/ suspension of license, permit, registration, quota, concession, clearances or a right given by the Government or sectoral regulator or any other authority by reason of commencement of insolvency resolution of the borrower. It is subject to the condition that there is no default in the payment of fees pertaining to the period of moratorium.
2. Personal Insolvency Regime (operative with effect from December 1, 2019)
The provisions relating to individual insolvency under the IBC relate to three distinct classes of persons: (i) personal guarantors to corporate debtors; (ii) partnership firms and proprietorship firms; and (iii) other individuals. The Central Government recently, by way of the notification dated November 15, 2019 ('Notification'), appointed December 1, 2019 as the date for the commencement of first phase i.e., the provisions relating to personal guarantors to corporate debtors. The insolvency resolution against personal guarantors may be triggered on default of amount equal to or more than INR 1000 (approx. USD 14). The AA for guarantors is the relevant: (i) National Company Law Tribunal ('NCLT') in cases where: (a) CIRP/ liquidation proceedings are pending against the corporate debtor to such guarantor in NCLT and a fresh application is required to be filed against such guarantor under IBC; and (b) the application is pending against the corporate debtor to such guarantor and the proceedings against the guarantor is also pending against some Court/Tribunal; and (ii) Debt Recovery Tribunal ('DRT'), in all cases other than those falling under category (i) above.
To fall in the category of 'personal guarantor', the person should be a guarantor to the company or the limited liability partnership or any other person with limited liability, as the case may be, and the guarantee given must have been invoked by the relevant creditor and remain unpaid in full or part.
3. Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020 ('Amendment Regulations') (operative with effect from January 6, 2020)
Some of the key amendments are set out below:
i. The Amendment Regulations clarify that a person, who is not eligible under the IBC to submit a resolution plan for insolvency resolution of the corporate debtor, will not be a party in any manner to a compromise or arrangement of the corporate debtor under Section 230 of the Companies Act, 2013. It also clarifies that a secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the IBC to submit a resolution plan.
ii. Further, if a secured creditor proceeds to realise its security interest and does not opt to relinquish such interest to the liquidation estate, such secured creditor will contribute its share of the insolvency resolution process costs, liquidation process cost and workmen's dues (relating to 24 months preceding the liquidation commencement date), within 90 days of the liquidation commencement date.
iii. The secured creditor is also required to pay the excess realised value of the asset, which is subject to security interest, over the amount of its claims admitted, within 180 days of the liquidation commencement date. Where the secured creditor fails to pay such amounts to the liquidator within 90 days or 180 days, as the case may be, the asset will become part of liquidation estate.
Please also refer to our Client Alert dated November 15, 2019 on the rules governing the insolvency resolution of financial service providers i.e., the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019.