Key Changes: Insolvency and Bankruptcy Code (Amendment) 2018

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The bankruptcy code is a one stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement.

• A strong insolvency framework where the cost, time, incurred is minimized in attaining liquidation has been long overdue in India. The code will be able to protect the interests of small investors and make the process of doing business a less cumbersome process.

• The Insolvency and Bankruptcy code consolidated the insolvency laws, provided a consolidated legislation and revolutionized the insolvency regime in India. Undoubtedly, the code had a significant on the way the Indian Corporates work.

• The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated on June 6, 2018. It amends the Insolvency and Bankruptcy Code, 2016.

• The Code provides a time-bound process for resolving insolvency in companies and among individuals. In simple words Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.

Key Points of Insolvency and Bankruptcy Code (Amendment) 2018

This ordinance brings some specific changes affecting mainly real estate and financial sectors. The notable changes are as follows:

1) Applicability of the Code to Micro, Small and Medium Enterprises (MSMEs)

The Ordinance provides that the ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be applicable to persons applying for resolution of MSMEs. The central government may, in public interest, notify the applicability of certain other provisions of the Code to MSMEs.

2) Special Provisions for MSME

The amendment ordinance gives some special benefits to the Micro, Small and Medium Sector Enterprises.

1. the promoters of MSMEs are allowed to bid for their companies as long as they are not willful defaulters, doesn’t attract any other related disqualification.

2. The anomaly in the section 29A of the existing act which had barred promoters of defaulting assets from bidding for their assets.

3) Financial creditors

The Code defines a financial creditor as a person to whom financial debt is owed.

1. Such debt includes any amount raised that has the commercial effect of a borrowing.

2. Financial creditors are a part of the committee of creditors, which is responsible for taking key decisions related to the resolution.

The Ordinance clarifies that an allottee under a real estate project will be considered a financial creditor. An allottee includes any person to whom a plot, apartment, or building has been allotted, sold, or transferred by a promoter.

4) Recognition to Home-buyers as Financial Creditors

After this amendment, the IBC law will recognize the homebuyers as financial creditors, giving them due representation in the Committee of Creditors (CoC).

Home buyers will be an integral part of the decision making process. The CoC will also have representation from security holders, deposit holders and all other financial creditors.

5) Financial Creditors To Appoint Authorized Representatives

1. The Ordinance allows the financial creditors to appoint authorized representatives in certain cases, such as when the debt is in the form of securities or deposits.

2. These representatives will participate and vote in the committee of creditors as per the prior instructions received from the creditors.

If Creditor does not give prior instructions, then the representative will abstain from voting.

6) Withdrawal of admitted insolvency applications

1. A resolution applicant may withdraw an application, filed to initiate an insolvency resolution process, from the National Company Law Tribunal (NCLT), after such process has been initiated.

2. Such withdrawal will have to be approved by a 90% vote of the committee of creditors.

7) Voting threshold of committee of creditors

1. The Code specifies that all decisions of the committee of creditors be taken by a majority of at least 75% of the financial creditors.

• The Ordinance lowers this threshold to 51%
• Further, the CoC voting threshold has been brought down to 66 percent from 75 percent for all major decisions such as approval of resolution plan, extension of insolvency period etc.

These include:

• appointment and replacement of the resolution professional,
• approval of the resolution plan, and
• approval of certain actions of the resolution professional during the insolvency resolution process. This is to encourage resolution versus liquidation.

8) Post Admission Withdrawal

Supreme Court’s passed decisions to permit withdrawal of insolvency proceedings post admission on a case specific basis, the 2018 Ordinance has introduced Section 12A permitting the NCLT to now allow insolvency proceedings to be withdrawn provided it has the consent of 90% of the voting share of the CoC members.

The application to withdraw must be submitted:

• by the same person who had filed the insolvency application to the resolution professional in the specified format prior to issuance of the invitation for expressions of interest
• be accompanied by a bank guarantee for the specified amounts.

• The application must be approved by the CoC by the relevant majority (i.e. 90%) within seven days and the resolution professional is required to submit the application to the NCLT within three days of such approval.

The condition (imposed under the regulations) that withdrawal is permitted only prior to issuance of the advertisement inviting expressions of interest considerably limits the applicability of this provision, which was not included in the 2018 Ordinance and is questionable.

9) Moratorium Not to Apply to Guarantors

• The 2018 Ordinance has clarified that the moratorium imposed by the NCLT Under Section 14(1) will not apply to guarantee contracts in relation to the corporate debtor’s debt.
• Additionally, Section 61(3) of the IBC has been amended to ensure that the NCLT will alsohave jurisdiction over the insolvency resolution of the corporate guarantor

10) Ineligibility to be a resolution applicant

The expression ‘Resolution applicant’ defines as any person who submits a resolution plan to the resolution professional and as per newly substituted definition ‘Resolution applicant’ person individually or Jointly with any other person,submits a resolution plan to the resolution professional.

• This Ordinance amends the criteria which prohibits certain persons from submitting a resolution plan, if such person is

1. Undischarged insolvent.

2. Willful defaulter according to guidelines of RBI under Banking Regulation Act,1949.

• Has convicted of any Offence Punishable with imprisonment-
  • For two years or more under any specified act.
  • For seven years or more under other law for time being in force.
• Disqualified as a director under Companies act 2013.
• Is prohibited by SEBI from trading in securities.

For example, the Code prohibits a person from being a resolution applicant if he has been convicted of an offence punishable with two or more years of imprisonment. Under the Ordinance, this provision will be applicable only for certain specified offences, and will not apply after two years from the date of his release from imprisonment.

• The Code prohibits a person from being a resolution applicant if his account has been identified as a non-performing asset (NPA) for more than a year.
• The Ordinance provides that this criterion will not apply if such applicant is a financial entity, and is not a related party to the debtor (with certain exceptions).
• The Code also bars a person from submitting a plan, if he has executed an enforceable guarantee in favour of a person who is a creditor to a defaulter undergoing a resolution process.
• The Ordinance amends this provision to specify that such a bar will apply if such guarantee has been invoked by the creditor and remains unpaid.

11) Implementation of resolution plans

The Ordinance specifies that the NCLT must ensure that a resolution plan has provisions for effective implementation, before approving it. Further, once the plan has been approved, the resolution applicant must obtain any necessary approvals, required by law, within a period of one year from such approval.

12) Section 29A bar people to enter

The new ordinance makes Section 29A more stringent in some cases. It is expected to bar people who enter into backdoor arrangements with corporate debtors formally or informally, directly or indirectly, from bidding for insolvent companies by bringing them within the scope of the definition of connected people. The definition of related individuals, which has so far not been covered in the code, is likely to be added as part of the amendments.

13) Significance for Real Estate

This ordinance provides relief to home buyers by recognizing their status as financial creditors. Due representation in Committee of Creditors (CoC) makes them integral part of the decision-making process. Section 7 of the law will allow financial creditors to file application seeking insolvency resolution process. This is important because many home buyers are facing hardships on account of delayed and incomplete real estate projects.

14) Other provisions of IBC Amendment code 2018

Other notable provisions are as follows:

1. It brings more clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process.

2. Addresses some issues such as non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value.

3. Exempts pure play financial entities from being disqualified on account of NPA and NPA acquired under Insolvency Code shall not disqualify an entity for next three years.

4. Successful resolution applicants will get a minimum one-year grace period to fulfill various statutory obligations.

5. It also addresses the much litigated issue of enforcement of guarantees.

CONCLUSION The objective of the Amendment act primarily is to prevent unscrupulous persons from misusing or vitiating the provisions of law. It ensures the transparency in CIRP by imposing strict eligibility criteria for being a resolution applicant and presenting a resolution plan and by introducing multiple layers of safeguards. This law was passed within 20 months from the inception of this idea, has now completed more than a year of operationalization. While the ‘big’ and ‘highly litigated’ cases stole the limelight and led to legislative changes, trends continued to build up. From the first six months of analysis till now, trends have largely remained the same. While these trends provide a glimpse of the first phase of the law, the absence of information about the entire life cycle of a case hinders a holistic analysis of the same. As we wait for these gaps to be filled, we will continue to keep our watchful eye on the IBC, through our empirical lens.