CS S. Dhanapal

CS S. Dhanapal

Insolvency and Bankruptcy Code 2016- A dawn of New Era- Part-III

-An Explainer on Recent Developments in the Code, 2016

Since its inception, the IBC, 2016 has been undergoing rampant changes to address the needs of the Corporates and its stakeholders. In part III of the Series of Articles on the Insolvency and Bankruptcy Code 2016 (IBC, 2016), we present to you the significant changes that have been notified in the legal periphery of the IBC, 2016 vide the Ordinance passed on 06.06.2018. The President on 6th June 2018, gave assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. The Ordinance came into effect immediately, i.e. from 06.06.2018. A cursory look on press note runs as below:

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. provides significant relief to home buyers by recognizing their status as financial creditors.  This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process.  It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers. Another major beneficiary would be Micro, Small and Medium Sector Enterprises (MSME), which form the backbone of the Indian economy as the biggest employer, next only to the agriculture sector.  Recognizing the importance of MSME Sector in terms of employment generation and economic growth, the Ordinance empowers the Government to provide them with a special dispensation under the Code.  The immediate benefit it provides is that, it does not disqualify the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP) provided he is not a willful defaulter and does not attract other disqualifications not related to default.  It also empowers the Central Government to allow further exemptions or modifications with respect to the MSME Sector, if required, in public interest.

In order to protect the sanctity of the CIRP, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 lays down a strict procedure if an applicant wants to withdraw a case after its admission under IBC 2016.  Henceforth, such withdrawal would be permissible only with the approval of the Committee of Creditors with 90 percent of the voting share.

With a view to encouraging resolution as opposed to liquidation, the voting threshold has been brought down to 66 percent from 75 percent for all major decisions such as approval of resolution plan, extension of CIRP period, etc.  Further, in order to facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51%.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 also provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in meetings of the Committee of Creditors, through the authorized representative.

The existing Section 29(A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities from being disqualified on account of NPA. Similarly, a resolution applicant holding an NPA by virtue of acquiring it in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition.  In other words, such NPA shall not disqualify the resolution applicant during the currency of the three-year grace period.

Taking into account the wide range of disqualifications contained in Section 29(A) of the Code, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 provides that the Resolution Applicant shall submit an affidavit certifying its eligibility to bid.  This places the primary onus on the resolution applicant to certify its eligibility.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 provides for a minimum one-year grace period for the successful resolution applicant to fulfill various statutory obligations required under different laws.  This would go a long way in enabling the new management to successfully implement the resolution plan.

The other changes brought about by the Ordinance include non-applicability of moratorium period to enforcement of guarantee; introducing the requirement of special resolution for corporate debtors to themselves trigger insolvency resolution under the Code; liberalizing terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period; and giving the IBBI a specific development role along with powers to levy fee in respect of services rendered.

The above mentioned changes are expected to further strengthen the Insolvency Resolution Framework in the country and produce better outcomes in terms of resolution as opposed to liquidation, time taken, cost incurred and recovery rate.

NOW LET ME DECODE THE Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 IN THE FORM OF EXPLAINER FOR BETTER UNDERSTANDING;

OPPORTUNITIES TO HOME BUYERS

  • In a major relief to home buyers, the definition of financial debt has been amended to the effect that home-buyers have now been included within the ambit of financial creditors, thereby enabling home-buyers to initiate CIRP of a Company in the event of a default.
  • Further, home buyers (if their number exceeds a number as prescribed) will also have a right to be represented on the Committee of Creditors (COC) through appointment of an Insolvency professional, other than the Interim Resolution Professional (IRP), who shall be appointed by an order of the NCLT on application of the IRP, prior to first meeting of the COC.
  • The Insolvency Professional so appointed shall have the right to attend the COC meetings and vote thereat in accordance with the instructions of the home-buyers to the extent of their voting share. Remuneration of the Insolvency Professional representing the home-buyers shall be specified by Regulations and it shall be jointly borne by the home-buyers.

This move is expected to benefit the large community of home buyers who prior to the amendment did not have any right in the CIRP process other than making a claim and awaiting their settlement. The home buyers have now been brought on par with other financial creditors empowering them with the right to be represented on the COC and have a say in the decision making process as well as the right to even initiate the CIRP in the event of default by the Builder / Developer (Corporate Debtor).

RELIEF TO MSME

  • “Micro, small and medium enterprises” means any class or classes of enterprises classified as such under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).
  • Relaxation to Resolution Applicants – The following restrictions under Section 29A shall not apply in case of MSMEs for a person / entity to be eligible as a Resolution Applicant:
    • A person or entity (other than a financial entity who is not a related party to the corporate debtor) who at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor and the amount remains overdue as on date of submission of the resolution plan, and
    • A person / entity who has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part.

Persons / entities suffering from the above disabilities may still submit a resolution plan for a MSME under CIRP.

  • Exemption from applicability of specified provisions of the Code – Central Government may by notification exempt the applicability of specified provisions of the Code to MSME or specify their applicability with such modifications as notified from time to time.

APPLICABILITY OF LIMITATION ACT, 1963

  • The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the National Company Law Tribunal, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.
  • The Code already provides that notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part II of the Code, the period during which such moratorium is in place shall be excluded.

AMENDMENT OF SECTION 434 OF COMPANIES ACT, 2013 (TRANSITIONAL PROVISIONS)

Any party or parties to any proceedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016. This amendment provides an opportunity whereby parties involved in a winding up proceeding may transfer such case for being taken up as a CIRP proceeding before the NCLT.

AMENDMENTS RELATING TO FILING OF APPLICATION FOR CIRP

  • As stated above, home-buyers can now initiate CIRP of a Corporate Debtor in the event of a default in the capacity as financial creditors.
  • For operational creditors, the requirement of producing a certificate from financial institution maintaining accounts of the operational creditor confirming that there is no payment of the unpaid operational debt by the corporate debtor shall arise only in the event of its availability. Operational Creditors may furnish a copy of record maintained by an information utility or any other proof (to be prescribed by Rules) confirming that there is no payment of an unpaid operational debt by the corporate debtor, as available, in support of their CIRP application.
  • Corporate debtors initiating their own CIRP will now have to seek and file approval of their shareholders by means of Special Resolution, in case of Companies or approval of at least 3/4th of the total number of partners in case of LLPs along with the application for the CIRP. This may prove to be time consuming, specially for listed companies.

WITHDRAWAL OF APPLICATION FILED FOR CIRP

  • An Application filed before NCLT for CIRP of a Corporate Debtor may be withdrawn with approval of 90% of voting share of the COC.

AMENDMENTS RELATING TO APPROVAL OF COC

Relaxation has been provided in matters which require approval of COC by easing the approval requirement from erstwhile 75% to 66%. The following decisions may now be taken with the approval of COC accorded by a voting of 66% which earlier required a 75% majority:

√ Extension of CIRP period beyond 180 days till 270 days

√ Appointment of RP in first COC

√ All actions by RP during CIRP as specified in Section 28(1)

√ Replacement of RP with another RP (new RP to give written consent)

√ Approval of resolution plan

√ Decision to liquidate the CD during CIRP (no percentage specified prior to amendment).

For routine matters, i.e. matters which do not require a specific majority as per the Code, simple majority of 51% is sufficient against erstwhile requirement of 75%.

AMENDMENTS RELATING TO REPRESENTATION OF CREDITORS THROUGH AUTHORISED REPRESENTATIVES ON COC

  • As stated above, home-buyers can be represented on the COC by an IP (other than IRP) who shall be appointed prior to first meeting of COC. This provision shall extend to other financial creditors of the corporate debtor also. Such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. The remuneration payable to the authorised representative shall be specified by Regulations which shall be jointly borne by the financial creditors.
  • Where a financial debt is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors. Such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. The remuneration payable to the authorised representative, if any, shall be as per the terms of the financial debt or the relevant documentation as applicable.
  • Where a financial creditor is represented by a guardian, executor or administrator, such person shall act as authorised representative on behalf of such financial creditors. Such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. The remuneration payable to the authorised representative, if any, shall be as per the terms of the financial debt or the relevant documentation as applicable.
  • In case of syndicate lenders / consortium lenders, the Code already provides for the representation of each of the lenders on the COC on their own, or through the trustee / agent appointed on their behalf, or through an IP (other than the IRP). The Code also already provides that any creditor being a member of the COC may represent himself on the COC through an IP (other than the IRP).
  • The restriction on a Financial Creditor or the authorized representative, who is a related party to the Corporate Debtor, to abstain from being represented, attend meetings or/and vote at meetings of COC has been relaxed in case of a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.
  • Rights and duties of authorised representatives have been prescribed now, which are as below:
  • Right to participate in COC meetings and vote as per instructions of the FC he is representing. Such instruction received from FC to be filed with COC for proper recording by the IRP/RP. If no instruction is received, authorised representative to abstain from voting;
  • Duty to circulate the agenda and minutes of the COC meetings to the FC he represents; and
  • Duty to act in interest of FC and to act in accordance with instructions of FC.

AMENDMENTS RELATING TO SUBMISSION AND APPROVAL OF RESOLUTION PLAN

  • Resolution applicant is required to submit an affidavit confirming satisfaction of requirements of Section 29A to the RP along with the resolution plan. With this amendment onus has been shifted to the RA to ensure and affirm compliance with requirements of Section 29A regarding the eligibility to be a RA.
  • Where in terms of the Resolution Plan, Shareholders’ approval is required, under any law, for a particular action under the Resolution Plan, the approval shall be deemed to have been given for the purpose of implementation of the resolution plan. This was earlier clarified by means of a Circular and has now been included in the Code.
  • Resolution Applicant is required to obtain the necessary approvals required under any law for the time being in force within a period of 1 year from the date of approval of the resolution plan by the NCLT or within such period as provided for in such law, whichever is later
  • NCLT has been vested with the responsibility to ensure that a Plan being approved by it is capable of being implemented, i.e. before approving a resolution plan, NCLT has to satisfy itself that the resolution plan has provisions for its effective implementation. All these amendments, where responsibility has been vested with the RA or the NCLT, will provide some breather to the RP who has been already loaded with the multitude of responsibilities in turning around the sick company.
  • Amended Section 29A shall apply prospectively, i.e. only to those resolution applicants who have not submitted any resolution plan till 06.06.2018.

AMENDMENTS RELATING TO CORPORATE GUARANTORS

  • Definition of Corporate Guarantor has been introduced in the Code to mean a corporate person who is surety in a contract of guarantee to a corporate debtor.
  • Moratorium during CIRP shall not extend to a surety in a contract of guarantee to a corporate debtor, i.e. to both personal as well as corporate guarantors. Creditors may invoke the guarantee to recover their dues and may also proceed against the guarantors during the CIRP if the recovery is not successful as the protection of moratorium as available to the Corporate Debtor shall not be available to the guarantors.
  • Further, Section 61 of the Code has been amended to provide that where a CIRP or liquidation proceeding of a corporate debtor is pending before the NCLT, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before the NCLT. Prior to the amendment, the Section had provision only for bankruptcy of a personal guarantor. With the amendment, corporate guarantors have also been included within the ambit of Section 61 to the effect that application for CIRP or liquidation of Corporate Guarantors of a Corporate Debtor shall also be filed with the NCLT.

AMENDMENTS RELATING TO INSOLVENCY PROFESSIONALS ACTING AS IRP / RP / LIQUIDATORS

  • Tenure of IRP shall continue till appointment of RP against erstwhile fixed tenure of 30 days.
  • For appointment of RP (IRP continues as RP or new RP is appointed) written consent of RP is required in a format to be specified.
  • Written approval of RP is required prior to his appointment as liquidator of the CD by order of NCLT. Prior to the amendment, the RP had no means to opt out of the appointment. Further, where the RP does not consent to be so appointed as the liquidator, NCLT is required to make a reference to the IBBI who shall propose the name of another insolvency professional along with written consent, in the form as specified, from the insolvency professional to the appointed as the liquidator. This provides an avenue to the RP to decide whether or not to seek appointment as liquidator of the Corporate Debtor.
  • IRP/RP shall be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor. The Resolution Professional vested with the powers of management of the corporate debtor has been made responsible for its legal compliances also.
  • Where a resolution plan is submitted by a resolution applicant for a corporate debtor, RP has to continue to manage the operations of the CD even after conclusion of CIRP till passing of order by NCLT u/s 31. This amendment will ensure seamless transition of the Company from CIRP to implementation of Resolution Plan or CIRP to liquidation as the case may be.

AMENDMENTS TO SECTION 29A

  • Applicant having a NPA Account (Section 29A(c)) – The restriction shall not apply in the following situations:
  • The Account is not so held at the time of submission of the resolution plan;
  • Applicant is a financial entity and is not a related party to the corporate debtor;
  • The Account was acquired pursuant to a prior resolution plan approved under the Code by the NCLT and a period of 3 years has not lapsed since the approval.
  • Applicant convicted for any offence punishable with imprisonment (Section 29A(d)) – The restriction shall apply in following cases only:
  • Applicant is convicted for any offence punishable with imprisonment for 2 years or more under any Act specified under the Twelfth Schedule, or
  • Applicant is convicted for any offence punishable with imprisonment for 7 years or more under any other law for the time being in force and a period of 2 years has not lapsed since release of the person from imprisonment.
  • Applicant associated with a company having preferential / undervalued transaction etc. (Section 29A(g)) – A person who has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the NCLT under this Code is already disqualified to be a resolution applicant. Now exemption has been provided in case such transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to such transaction.
  • Applicant being a guarantor (Section 29A(h)) – The restriction shall apply only in case where the guarantee has been invoked and remains unpaid in part or full.

Wrap up

The Insolvency and Bankruptcy Code, (Amendment) Ordinance, 2018 has brought in its wake many profound changes in the Insolvency and Bankruptcy Code, 2016. While it has introduced many positive changes for home-buyers, MSMEs etc., it has also posed a number of challenges for the Resolution Applicants, Resolution Professionals and the Corporate Debtor. Overall, this amendment seeks to have tightened some of the loopholes and given hope to the community of home-buyers which was much needed given the state of current affairs in our economy. In this context, recently, IBBI amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018 with effect from 4th July 2018 which I propose to cover in my next part in continuation to this writeup.

(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.)

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One response to “All about Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018”

  1. Sharad jejani says:

    Sir, we are having MSME industries , we want to submit our Resolution plan/Repayments plan without upfront with assured to clear debt in 3 years with reducing interest. Company is having spare 50 acres land to generate funds from real estate projects. Please advise shall our Resolution plan consider by COC without upfront deposit. Jejani pulp & paper mills p ltd wadsa 9422145200

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