Union Government promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 on December 28, 2019. The Ordinance is effective at once. The Ordinance proposes to make amendments in the various provisions Insolvency and Bankruptcy Code, 2016; notably in Sections 5(12), 5(15), 7, 11, 14, 16(1), 21(2), 23(1), 29A, 227, 239, 240 in the Insolvency and Bankruptcy Code, 2016 and insert new section 32A in the code. In this article we shall examine the implications of the said amendments.
Section 5(12) defines “insolvency commencement date”. As the process prescribed has legislatively defined timeline, the date is important. With this change, the insolvency commence date is date of admission of application under Section 7,9 or 10 of the Act, irrespective of the date when an Insolvency Resolution Professional is appointed. Amendment in Section 5(15) increases the ambit of “interim finance” raised by the IRP.
Changes in Section 7 is far reaching. In case of financial creditor referred to in clause (a) or (b) of sub-section 6A of Section 21, an application for initiating corporate insolvency application can be filed jointly by not less than 100 such creditors in the same class or not less than 10% of the total such creditors in the same class, whichever is less.
Clause (a) of subsection 6A of Section 21 refers to a financial debt in the form of securities or deposits where appointment of trustee or agent has been provided to act on behalf of such creditors. Clause (b) of the subsection 6A of Section 21 refers to financial debt owed to a class of creditors regarding which IRP shall make an application for appointment of another insolvency professional as authorised representative.
Normally such debts, as referred to in clause (a) or (b) of sub-section 6A of Section 21 is financial debt owed to retail debenture holders or depositors. Thus, such retail debenture holders/depositors can file application only jointly with 100 other such debenture holders/depositors or 10% of the total number of financial creditors of such class, whichever is less. The amendment effectively bars application under Section 7 of the IBC by a financial creditor being single debenture holder or depositor.
Another important change has been made in case of financial creditor as allottees under a real estate project. The amendment ordinance provides that an application for initiating corporate insolvency application can be filed only jointly by not less than 100 such allottees or not less than 10% of the total such allottees, whichever is less. Thus, for example, if a real estate project has 500 allottees, the application can be filed only jointly by at least 50 allottees.
It has been experienced that corporate insolvency applications are being initiated by individual debenture holders or depositors or real estate allottees in order to pressurise the corporate debtor to given in to their demands. In such applications, insolvency process was generally not the purpose. Thus, the IBC process was used as a recovery procedure by many of the creditors, which have defeated the very purpose of IBC. The amendments are likely to put a stop on such practices, leading to sanctity of the corporate insolvency process. Though at the same time, in case of serious defaults, real estate allottees or retail debenture holders or depositors can very well start the process by filing a joint application with required numbers of co-applicants.
The amendment made in Section 7 is applicable to pending applications where the application has not been admitted. In such cases, the applicant has to fulfil the conditions of joint application within 30 days from the date of ordinance [27th January, 2020]. If such amendment is not made in the prescribed time limit, the applications shall be deemed to have been withdrawn before admission. The provision is likely to reduce the workload of tribunals substantially, so that tribunals can concentrate on serious cases of defaults.
Explanation has been added in Section 11 of the IBC to clarify that a corporate debtor can initiate insolvency process against another corporate debtor. Section 14 has been amended to allow corporate debtor to exist as a going concern. It explains that all registrations, permissions, quota, rights etc. shall not be suspended on the ground of initiation of insolvency process. Further clause 2A has been added in Section 14 to provide that supply of goods or services shall not be terminated merely because insolvency process has started, provided the corporate debtor is making payment for such supplies.
Section 16 of the IBC has been amended to provide that insolvency resolution professional shall be appointed on the date of insolvency commencement date. Section 23 of the IBC has been amended to allow the IRP to manage the affairs of the corporate debtor till the approval of the resolution plan or till appointment of liquidator.
A new Section 32A has been inserted by the ordinance. Clause (1) of Section 32A provides that corporate debtor shall not be prosecuted for any offence made prior to initiation of corporate insolvency process, if the process results in change in management. The clause provides for no initiation of prosecution after the insolvency resolution plan has been approved by the adjudicating authority leading to change in management. The clause uses the term “offence” and “prosecution”. Thus, the clause refers to criminal liability only. It appears that civil proceedings resulting in penalty etc. can be initiated for civil wrongs done by the corporate debtor before initiation of corporate insolvency process; against the corporate debtor even after new management has taken control. Sub-section (2) protects the property of corporate debtor in relation to offences committed prior to commencement of insolvency process. Again, the sub-section refers to “offences”. Thus, corporate debtor’s property is not protected against civil liabilities, arisen prior to the commencement of insolvency process.
Thus, Section 32A, though grants certain immunity to the new management and corporate debtor under new management; it falls short of giving any substantial relief to the new management. Corporate debtor under new management is even now liable to numerous civil liabilities, incurred prior to commencement of insolvency process in terms of penalty, tax, interest etc. Many times such liabilities are not known in the corporate insolvency process as such liabilities are statutory liabilities and government departments generally do not participate in the insolvency process. It shall result in reluctance on the part of the resolution applicant to take over corporate debtor management. It is suggested that new management of corporate debtor must be granted immunity from all liabilities incurred prior to the corporate insolvency process and not brought to notice in the insolvency process. Unless certainly from liabilities, both civil and criminal, are granted to new management, resolution applicants shall be reluctant to take over corporate debtors. This reluctance will defeat the very purpose of the insolvency process.
[The author is Managing Partner of “Rajesh Kumar and Associates. Author can be contacted on firstname.lastname@example.org]