India: Ray Of Hope: The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2018

Last Updated: 11 June 2018
Article by Jyoti Singh and Smiti Verma

Most Popular Article in India, June 2018

'Whether a law is working or not, can be determined by its relevance and fairness to all stakeholders.'

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance) has been promulgated by the President of India on June 6, 2018. In what can be called as the most substantive amendment to the Insolvency and Bankruptcy Code, 2016 (IBC) till date. The objective of the Ordinance is "to balance the interests of various stakeholders in the Code, especially the interests of home buyers and micro, small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants"

The Ordinance shows the government's efforts to resolve issues that were coming in the way of smooth working of the IBC. The Ordinance plugs in loopholes in the IBC that have drawn criticism in the recent past and had also resulted in the pendency of matters before judicial forums.

Material Amendments:

Some of the most notable amendments brought into effect by the Ordinance are as follows:

  • The definition of "financial debt" has been expanded to include any amount raised from an allottee under a real estate project which shall be deemed to be an amount having the commercial effect of a borrowing for the purposes of Section 5(8) (f) of the IBC. What this essentially means is that home buyers shall now be considered financial creditors putting to rest several doubts that had arisen pursuant to the initiation of the corporate insolvency resolution process (CIRP) of some of the large real estate companies. Not only will home purchasers have a place in the CoC, they will also now be able to file insolvency applications against truant real estate companies (Explanation (i) and (ii) in subclause (f), in clause (8) to section 5);
  • Definition of "related party" including the explanation with details of persons who would fall within the meaning of "relative" has been inserted (section 24A). This amendment will put to
  • rest several matters (including some of the first 12 RBI cases), which are held up before Adjudicating Authorities/ Appellate Tribunal/ Supreme Court. The definition of "related party" gained impetus after introduction section 29A by the Insolvency and Bankruptcy Code (Ordinance) 2017;
  • In light of several parties invoking section 142 of the Constitution of India before the Hon'ble Supreme Court and with an objective to reduce burden of judicial forums, the Ordinance allows
  • withdrawal of applications admitted under section 7, 9 or 10 of IBC with approval of ninety percent voting share of committee of creditors (CoC). (section 12A);
  • In order to avoid misuse of moratorium under section 14 of the IBC, the Ordinance has kept the corporate guarantors out of moratorium and thus not extended this protection to them. (section 14 (3) (b));
  • With the objective of giving impetus to resolution as opposed to liquidation of corporate debtors, the threshold of voting percentage needed for taking major decisions by the CoC, such as approval of resolution plan has been reduced from 75% to 66% (section 12 (2), 22(2), 27 (2), 28 (3), 30 (4) and 33). Similarly, for taking routine decisions to run the corporate debtor as a going concern, the voting threshold now stands reduced to 51% (section 21 (8)). The objective behind this amendment seems to be to avoid unfortunate situations of liquidation where even though the proposed resolution plan was approved by a majority of the CoC members, the corporate debtor still went into liquidation as the voting percentage fell slightly short of the 75% figure and also to ensure that the routine decisions are not held up in the absence of 3/4th majority;
  • Also amending the term of interim resolution professionals (IRP), the Ordinance specifies that the term of the IRP shall continue till the date of appointment of the RP (section 16 (5)). Similarly, about the term of the resolution professional (RP) it is clarified that the if a resolution plan is submitted under Section 30(6) of the IBC, the RP shall continue to manage the operations of the corporate debtor after the CIRP period till the Adjudicating Authority passes an order under Section 31 of the IBC (proviso to subsection (1) to section 23);
  • The introduction of a new Section 25A mandating that the authorized representative of a creditor have the right to participate and vote in CoC meetings aims to curtail situations where the representatives of creditors do not possess the requisite authority to vote on the agenda of CoC meetings;
  • Amendments to section 29A have been introduced to bring more clarity to the criteria for eligibility for submission of resolution plan. By inserting the meaning of "financial entity", who would not fall afoul of the eligibility criteria on account of it being a "related party" (proviso of Explanation I and newly inserted Explanation II after clause (j) in section 29A), will result in more participation by prospective resolution applicants in the resolution process;
  • Very importantly, the Ordinance puts to rest the issue of whether the Limitation Act, 1963. The Ordinance has now introduced a new section that explicitly states that the Limitation Act shall apply to proceedings under the IBC. This assumes importance in light of several conflicting decisions of various benches of the Adjudicating Authority, the Appellate Authority and a pending case in this regard before the Hon'ble Supreme Court (section 238A);
  • Furthermore, taking into account the impact of exclusion of promoters from submitting resolution plans pursuant to the introduction of Section 29A on micro, small and medium enterprises (MSMEs), the Ordinance has made dispensations with provisions of clauses (c) to (h) of section 29A in respect of MSMEs (section 240A (1)).

Takeaways:

The Ordinance has significantly boosted the insolvency resolution framework with notable changes such as recognizing home buyers as financial creditors, making authorized representatives of CoC members accountable, amending section 29A, dispensation with approval of shareholders and timeline for seeking approvals from government agencies by the resolution applicants post the approval of resolution plan by the Adjudicating Authority.

The most important takeaway is that the Ordinance further reasserts that resolution of insolvency is the aim of IBC as opposed to liquidation. By reducing the mandatory voting percentage to 66% for material decisions and 51% for regular decisions, the Ordinance gives a clear signal that minority creditors will not be able to hold the CIRP hostage. This appears to be an attempt to rectify situations where despite efforts by majority creditors to resolve the indebtedness of corporate debtors, they have been unable to do so due to a deadlock in the CoC. The intent of having specific duties and responsibilities of authorized representatives attending CoC meetings is to ensure that decisions in CoC meetings are taken in an expeditious manner.

In keeping with its objective to encourage revival and recognizing that most MSMEs are unlikely to attract resolution applicants apart from their promoters, the Ordinance accords certain dispensations to the promoters of the MSMEs, making them eligible to submit resolution plans if they meet the other eligibility criteria under Section 29A.

It is heartening to note that the government remains committed to promptly ironing out the creases as far as the IBC is concerned. The Ordinance is a notable endeavor of the government to impress upon all stakeholders that it is serious about making the IBC a success story.

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.

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