The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019
The Insolvency and Bankruptcy Code, 2016 (“Code”) since its enactment has evolved and been subject to changes for a better realisation of the objectives of the Code. However, there was still a need to fill certain gaps in order to clear some grey areas and required legislative intervention to achieve the indented result. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (“Ordinance”) promulgated on December 28, 2019, is a step towards that will help to overcome such critical gaps in the corporate insolvency framework.
The Ordinance is aimed to remove bottlenecks in the corporate insolvency resolution process (“CIRP”) as well as streamline the same by ensuring maximisation of value of assets and the corporate debtors, a transparent insolvency procedure and prevent potential exploitation of the corporate debtor by certain classes of financial creditors.
Salient features of the Ordinance
1. Introduction of a minimum threshold for initiating CIRP by the financial creditor
Earlier the Code was being misused to pressurize the corporate debtor by many debenture holders/ depositors and individual allottees of real estate. These applications only acted for recovery rather that the main objective of the Code. In order to avoid frivolous triggering of the CIRP, the Ordinance has added on aproviso to Section 7 has prescribed a minimum threshold for certain categories of the financial creditors. This will prevent an individual allottee or debentures holder/depositor from initiating a CIRP against a corporate debtor for such practices. As per the ordinance, the categories of financial creditors mentioned above can initiate the CIRP only if a joint application is filed comprising of hundred (100) of such allottee/creditors of the same real estate project/same class or not less than ten percent (10%) of such allottee/creditors of the same real estate project/same class.
Further, if an application has already been filed for the initiation of CIRP before the commencement of the Ordinance but has not yet been admitted by the adjudicating authority, then such application will have to comply with the provisions of this ordinance. A period of thirty days (30) has been granted to make such modifications.If the requirement is not complied with within such period, then the application shall be deemed to be withdrawn.
2. Maximize the value of the corporate debtor during the moratorium period
To ensure that foundation of the business of a corporate debtor is not lost during the moratorium period, the Ordinance has added clause 2A in Section14 of the Code. This change allows the continuance of the supply of goods and services if the interim resolution professional (“IRP”) or the resolution professional consider them critical to protect and preserve the value of the corporate debtor and manage the operation of such corporate debtor.The Ordinance also clarifies that a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other law for the time being in force shall not be suspended or terminated on the grounds of insolvency.
However, the above provisions won’t be applicable if such supply or suspension or termination is on the ground of default in payment.
3. Liability of the corporate debtor and his assets for the offences committed before the initiation of CIRP
The primary purpose of the CIRP process, which involves a speedy recovery of dues owed to the creditors,was being hindered due to the proceedings initiated by the investigating agencies. Such proceedings thwarted the process of resolution of insolvency as well as the revival of the company. Further, the banks were facing problems in realising the dues from non performing asset (NPA), as such properties were carrying liabilities of the corporate debtor. Moreover, the encumbrances on the property of the corporate debtor made the prospective resolution applicant reluctant from submitting a resolution plan. To ensure the realisation of the objects of the CIRP and to smoothly hand over the control of corporate debtor to a successful resolution applicant, a new Section 32A has been inserted by the Ordinance.
The aforesaid Section precludes the corporate debtor from the liability of an offence committed prior to the commencement of the CIRP provided that a resolution plan has been approved by the adjudicating authority and such a plan results in a change in the management or control of the corporate debtor as prescribed in Section 32A. This immunity is also provided to the assets of the corporate debtor mentioned in the approved resolution plan. This will prevent physical as well as intellectual assets of the corporate debtors from being attached, seized, confiscated or retained. Further, if a prosecution has already been instituted against such a corporate debtor then it shall stand discharged from the date of approval of the resolution plan.
However, such immunity won’t be provided to the promoter, designated partner (in case of limited liability partnership) or an officer in default (in case of a company), every person who was, in any manner, in charge of or responsible to the corporate debtor for the conduct of its business, or every person associated with the corporate debtor in any manner and who was directly/indirectly involved in the commission of the offence as per report of the investigation authority. This will create a balance as it will ensure that the new management of the corporate debtor does not become subject to any liabilities due to the actions of previous management along with ensuring that those who were at fault do not escape their liabilities by taking advantage of this provision.
4. Clarification on the insolvency commencement date and appointment of IRP
Earlier, as per the proviso in Section 5(12) of the Codein case an IRPwas not already appointed at the time of admission of application for initiating corporate insolvency resolution process by the adjudicating authority, the insolvency commencement date was deemed to be the date on which IRP was appointed. This created a lot of confusion as it provided two dates for the commencement and impeded the proper application of Section 16(1) of the Code which states that the adjudicating authority shall appoint an IRP within fourteen (14) days from the insolvency commencement date. The Ordinance now has removed the proviso in Section 5(12). With this change, the insolvency commencement date is the date of admission of the application under Section 7, 9 or 10 of the Code, irrespective of the date when an IRP is appointed. Further, Section 16(1) of the Code has also been amended to provide that insolvency resolution professional shall be appointed on the date of the insolvency commencement date.
5. The right of corporate debtor to initiate CIRP
In the Code there was no clarity on the aspect whether a corporate debtor can initiate a CIRP against another corporate debtor. However, the Ordinance has with an explanation added to Section 11of the Code, given the right to a corporate debtor to initiate a CIRP against another corporate debtor even while a CIRP is in progress against the former corporate debtor. This will ensure that all other corporates which have defaulted will be apprehended and will become subject to CIRP.
The Ordinance is incontestably a welcomed and much-needed change in the Code. The amendment addressed some of the crucial gaps which helped in streamlining the CIRP and in ensuring a smooth and successful revival of a bad named company by enabling a liability-free acquisition of assets. Further, the Ordinance also safeguards and ensures corporate debtor to exist as a going concern during the moratorium period.
Along with these major changes mentioned above some minor changes in the Code have also been brought through the Ordinance which include extension of the responsibility of resolution professional till approval resolution plan/ commencement of liquidation, widening the scope of the conditions on which a financial creditor shall not be considered to be a related party of the corporate debtor etc. However, there are still certain grey areas which can lead to complications in the future implementation of the code, like lack of clarification on the nature of offences mentioned in section 32A.
This update is prepared by Urvisha Kesharwani, who is interning with the firm under the guidance of Mr.Abhishek Naik, Advocate &Senior Associate at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: email@example.com or Mob: (+91) - 9776612121