Personal Guarantors to Corporate Debtors
The Code classifies individuals into three classes, namely, personal guarantors (PGs) to corporate debtors (CDs), partnership firms and proprietorship firms, and other individuals, to enable implementation of individual insolvency in a phased manner. The Central Government, vide a notification dated November 15, 2019, appointed December 1, 2019 as the date for commencement of the provisions of the Code relating to PGs to CDs.
It also notified the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 on the same date. These Rules provide for the process and forms of making applications for initiating insolvency resolution and bankruptcy proceedings against PGs to CDs, withdrawal of such applications, forms for public notice for inviting claims from the creditors, etc.
Financial Service Providers
The Central Government notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) on November 15, 2019 to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks. The Rules apply to such FSPs or categories of FSPs, as will be notified by the Central Government under section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings. This will not apply to banks. This is an interim mechanism to deal with any exigency, pending introduction of a full-fledged enactment to deal with financial resolution of Banks and other systemically important FSPs.
The Rules provide that the provisions of the Code relating to the Corporate Insolvency Resolution Process (CIRP), Liquidation Process and Voluntary Liquidation Process for a CD shall, mutatis mutandis, apply to a process for an FSP, subject to modifications, as under:
(a) The CIRP of an FSP shall be initiated only on an application by the appropriate regulator.
(b) On admission of the application, the Adjudicating Authority (AA) shall appoint the individual, who has been proposed by the appropriate regulator in the application for initiation of CIRP, as the Administrator.
(c) While conducting a proceeding of an FSP, the Administrator shall have the same duties, functions, obligations, responsibilities, rights, and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be. He shall be appointed or replaced by the AA on an application made by the appropriate regulator in this behalf.
(d) The appropriate regulator may constitute an Advisory Committee of three or more experts to advise the Administrator in the operations of the FSP during the CIRP.
(e) An interim moratorium shall commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the AA.
(f) The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.
(g) The Administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central Government under section 227.
(h) The license or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the CIRP.
(i) The FSP shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.
(j) The AA shall provide the appropriate regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP.
The Central Government in consultation with the Reserve Bank of India, on November 18, 2019, notified that the insolvency resolution and liquidation proceedings of non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore or more, as per last audited balance sheet, shall be undertaken in accordance with the above framework.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019
The Government introduced the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 in the Lok Sabha on December 12, 2019. The Bill was referred to Standing Committee on Finance for examination and report
The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 on December 28, 2019 to further amend the Code in order to remove certain ambiguities and ensure smooth
implementation, by providing for the following:
(a) Interim finance: The Code enables the RP to raise interim finance to keep the CD as a going concern and such interim finance is included in the CIRP cost. Interim finance means any debt raised by the RP during CIRP. The Ordinance includes such other debt as may be notified within the ambit of interim finance.
(b) Initiation of CIRP: The Code provides that a financial creditor (FC), either by itself or jointly with other FCs, may file an application for initiation of CIRP of a CD. The Ordinance provides that where creditors belong to a class, the application shall be filed jointly by not less than 100 such creditors or 10% of the number of creditors in the such class, whichever is less. Further, the Code prohibits certain persons from initiating a CIRP. The Ordinance clarifies that the said prohibition does not prevent a CD from initiating CIRP against another CD.
(c) Moratorium: In order to facilitate continuation of a CD as a going concern during CIRP, the Ordinance prohibits certain actions against the CD. The Ordinance clarifies that a license, permit, registration, quota, concession, clearance or a similar grant or right given by the Central government, State government, local authority, sectoral regulator or any other authority constituted under any other law, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising from the use or continuation of such grants during the moratorium period. Further, the Code mandates continuation of essential services to the CD during moratorium. The Ordinance provides for continuation of supply of goods and services which the IP considers ‘critical’ to protect and preserve the value of the CD and manage the operations of such CD as a going concern, except where such CD has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified. This would enable continuation of the CD as a going concern.
(d) Liability for prior offences: The Ordinance has inserted section 32A to provide that the liability of a CD for an offence committed prior to the commencement of the CIRP shall cease, and the CD shall not be prosecuted for such an offence from the date the resolution plan has been approved by the AA, if the resolution plan results in the change in the management or control of the CD. However, every person who was a designated partner or an ‘officer who is in default’ or was in any manner in-charge of the conduct of the business of the CD in any manner and who was directly or indirectly involved in the commission of such offence shall continue to be liable to be prosecuted and punished for such offence committed by the CD. Similarly, no action shall be taken against the property of the CD in relation to an offence committed prior to the commencement of the CIRP of the CD, where such property is covered under a resolution plan approved by the AA, which results in change in control of the CD. These provisions are subject to the CD or any person, who may be required to provide assistance, extending assistance and cooperation to any authority investigating the offence committed prior to the commencement of the CIRP. This would encourage prospective resolution applicants to submit resolution plans undeterred by uncertainties surrounding the offence committed by the CD prior to CIRP.
(e) Resolution of FSPs: The Code enables the Central Government to notify FSPs or categories of FSPs for the purpose of their insolvency and liquidation proceedings to be conducted under the Code in such manner as may be prescribed. The Ordinance clarifies that such proceedings may be conducted with such modifications and in such manner as may be prescribed. This would enable using the process under the Code with appropriate modifications for insolvency proceedings of FSPs.
Insolvency Professionals Regulations
IBBI amended the IBBI (Insolvency Professionals) Regulations, 2016 on October 25, 2019. The amendment has refined the form for registration as an IP and form for recognition as an IPE to facilitate processing of the applications. It has introduced an annual compliance certificate by an IPE to strengthen monitoring.
Personal Guarantors Regulations
IBBI notified the IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (Insolvency Regulations) and the IBBI (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (Bankruptcy Regulations) on November 22, 2019. The Insolvency Regulations specify the details of the insolvency resolution process for PGs to CDs, inter-alia, including:
(a) eligibility to act as a resolution professional for an insolvency resolution process;
(b) manner of receipt and verification of claims of creditors;
(c) manner of preparation of list of creditors, holding the meetings of the creditors and voting in the meeting;
(d) contents of the repayment plan; and
(e) procedure of filing of application for issuance of discharge order, etc.
The Bankruptcy Regulations provide details of the bankruptcy process for PGs to CDs, inter-alia, including:
(a) eligibility to act as a bankruptcy trustee for the bankruptcy process;
(b) manner of preparation of reports and timeline for submission by the bankruptcy trustee;
(c) manner of collating claims and formation of committee of creditors, holding meetings of the committee and voting in the meeting; and
(d) manner of realisation of assets of the bankrupt and its distribution, etc.
IBBI notified the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2019 on November 28, 2019. Some of the amendments made by these Regulations are consequential to the Insolvency and Bankruptcy Code (Amendment) Act, 2019, which came into force on August 5, 2019. Further, in the interest of transparency and accountability in conduct of CIRPs and conduct of the IPs, and to facilitate the IBBI, the IPAs and the IPs to discharge of their statutory obligations, the Amendment Regulations require the IPs to file a set of Forms, covering the life cycle of a CIRP, online on an electronic platform hosted on the website of the IBBI at https://www.ibbi.gov.in. An IP shall be liable to action permissible under the Code, including refusal to issue or renew Authorisation for Assignment (AFA), for failure to file a Form or for inaccurate or delayed filing.
Divergence in the Asset Classification
The RBI, vide notification dated April 1, 2019, mandated banks to disclose certain cases of divergence in the asset classification and provisioning in the Notes to Accounts in the ensuing Annual Financial Statements. These disclosures in respect of divergence and provisioning are in the nature of material events / information and hence, necessitate immediate disclosure. Further, this information is also price sensitive, requiring prompt disclosure. Accordingly, the Securities and Exchange Board of India (SEBI) issued a circular on October 31, 2019 requiring the listed banks to make disclosures of divergences and provisioning beyond specified threshold, as mentioned in aforesaid RBI notification, as soon as reasonably possible and not later than 24 hours upon receipt of the RBI’s Final Risk Assessment Report. The disclosures are required to be made in either or both of the following cases:
(a) the additional provisioning for NPAs assessed by RBI exceeds 10% of the reported profit before provisions and contingencies for the reference period, and
(b) the additional gross NPAs identified by RBI exceed 15% of the published incremental Gross NPAs for the reference period.