IBC Ordinance: Addressing the inadequacy?
Apurv Sardeshmukh (Partner, Legasis Partners)
Aanchal Lamba (Associate)
Insolvency and Bankruptcy Code Amendment (Ordinance) 2018 (“Ordinance”) has come into effect after receiving presidential assent on June 6, 2018. The Ordinance amends the Insolvency and Bankruptcy Code (“IBC”) to incorporate certain regulatory reliefs and further clarify the position of law. The Ordinance has received a lot of media attention wherein the masses have stated that it “eases” the provisions of the IBC and further provides relief to certain classes of creditors. Though the move was expected, the question that arises is whether the Ordinance appropriately covers what was expected and whether it addresses the need of the hour.
Background:
The IBC was introduced in 2016 with the sole objective of remodeling the scenario of increasing Non-Performing Assets (“NPA”) in the banking industry. In the last two years, a number of proceedings have been initiated under the IBC which have in turn bought to light the practical difficulties which are faced while implementing the provisions of the IBC. Amongst other amendments and rules introduced, IBC was amended by virtue of the IBC (Amendment) Act, 2018 (“IBC Amendment Act”) in January, 2018 to provide clarifications with respect to certain provisions and further regulate the “resolution process” under the same. An Insolvency Law Committee (“Committee”) was set up in November, 2017 which presented a report in March, 2018 highlighting the practical difficulties and loopholes in the IBC and suggested a number of amendments. These suggestions of the Committee set the groundwork for the Ordinance which received the assent of the cabinet on May 23, 2018 and finally have come into effect after receiving the presidential assent on June 6, 2018.
What has changed?
The seminal changes brought about by the Ordinance are as follows:
1.Home-Buyer Relief: Home-buyers will now be recognized as financial creditors under the IBC since an “allotte” of a real estate project has now been brought in line with the financial creditor. This amendment resolves the confusion regarding the status of homebuyers created due to the difference in opinion of the National Company Law Appellate Tribunal and the Supreme Court.
2.Micro, Small and Medium Enterprise: Section 240A has been introduced to allow the promoters of Micro, Small and Medium Enterprise (“MSME”) to participate in the bidding process and further empower the government to exclude MSME from the purview of certain sections of IBC.
3.Withdrawal of Application: The new Section 12A states that the Adjudicating Authority may allow the withdrawal of application as submitted under the IBC on an application made by the applicant with the approval of 90% of the voting share of the Committee of Creditors, in the manner prescribed. However, such an application shall only be allowed till the commercial process of the bidding begins.
4.Linking proceedings of the Corporate Guarantor and the Corporate Debtor: Section 60 of the IBC has been amended to entrust the National Company Law Tribunal with the power to deal with the insolvency resolution or liquidation processes of the corporate debtor together with the corporate guarantor in relation to the same debt. Corporate Guarantor has also been defined under the IBC as a corporate person who is surety in a contract for a corporate debtor.
5.Approvals/Resolutions: Voting threshold prescribed for obtaining the approval of the Committee of Creditors for extension of Corporate Insolvency Resolution Process (“CIRP”) has been reduced to 66% from 75% and for obtaining the approval of the Committee of Creditors for appointment of Resolution Professional or replacement of the Resolution Professional from 75% per cent to 66%. Further, specific consent is now to be obtained from Interim Resolution before his appointment as a Resolution Professional. The voting threshold for the specific actions specified in Section 28 of the IBC has also been revised from 75% to 66%. If the resolution professional intimates the Adjudicating Authority of the decision of the committee of creditors to liquidate the corporate debtor, the same shall now be approved by a majority of only 66%. For routine decisions, voting thresholds have also been reduced to 51%.
6.Related Parties: Related Parties are now defined under the IBC. The related parties of the creditors are disqualified from participating in the Committee of Creditors subject to certain exceptions.
7.Applicability of the Limitation Act: Section 238A has been inserted which now specifically states that the Limitation Act, 1963 shall apply to proceedings or appeals made under IBC before the National Company Law Tribunal or the National Company Law Appellate Tribunal.
8.Transfer of Pending Applications: There was a huge confusion in relation to time-barred debts which came to surface time and again in landmark cases such as, Black Pearl Hotels Pvt. Ld. v. Planet M Retail Limited[1]. Time-barred claims were filed since the National Company Law Appellate Tribunal and the court had held that limitation would apply only from 2016 i.e. when IBC came into force. Section 434 of the Companies Act, 2013 has now been amended in line with Paragraph 34 of Schedule XI of the IBC to state any party or parties to any proceedings relating to the winding up of companies pending before any court immediately before the commencement of the Ordinance, may file an application for transfer of such proceedings and the court may order for the transfer such proceedings. Such proceedings will be dealt with the National Company Law Tribunal as an application for initiation of the corporate insolvency resolution process.
9.Exclusion of disqualification of financial entities: Section 29(A) which enlists entities and persons who are disqualified from bidding has been fine-tuned to exempt pure play financial entities from being disqualified on account of having NPAs. Also, NPA acquired under the IBC shall not disqualify an entity for the next three years. Further, taking into account the wide range of disqualifications contained in Section 29(A), the Ordinance provides that the Resolution Applicant shall submit an affidavit certifying its eligibility to bid.
10.Procedural Changes to the CIRP: A number of changes have been made to the procedural requirements such as:
- the Central Government is now empowered to notify a person who may file an application under the IBC;
- in line with the Hon’ble Supreme Court in Macquarie Bank Limited v. Shilpi Cable technologies Limited[2], the requirement for operational creditors to submit a certificate from a financial institution along with the application has been made optional;
- flexibility for an operational creditor to submit restricted documents as proof of its debt has been provided;
- the provision related to moratorium will not apply to transactions that may be notified by the central government in consultation with any financial regulator nor to a surety in contract of guarantee with a corporate debtor;
- the Interim Resolution Professional shall now continue to be appointed until a Resolution Professional is appointed and will be responsible for complying with the statutory requirements under the applicable laws while managing the affairs of the corporate debtor;
- authorized representatives of the creditors can now for form a party to the Committee of Creditors who have further been entrusted upon with certain rights as well;
- the National Company Law Tribunal, before passing an order of approval of resolution plan, shall now ensure that the resolution plan has a satisfactory implementation plan and all necessary approvals from the Central and State Governments and other authorities may be obtained within a period of one year from the date of approval of the resolution plan by the National Company Law Tribunal or such time as is specified in the relevant law.
Critical Analysis:
Though substantial changes have been brought about by the Ordinance a few questions still remain unanswered. Post the report of the Committee, there were other suggestions which the stakeholders were looking forward to. Today, the majority of litigation which is initiated under the IBC is that which relates to Section 29A. Section 29A was incorporated in the IBC by virtue of IBC Amendment Act. The Section laid down a wide range of disqualifications enlisting those who shall not be eligible to submit a resolution plan under the IBC. The ironing out of this Section was what the stakeholders were eagerly looking forward to. Though Section 29A has been amended, the amendments are only limited in nature and most of the recommendations of the Committee in relation to the same have not been accepted. The Committee had suggested that the scope of applicability of the disqualifications in Section 29A shall be limited by deleting reference to \"person acting jointly or in concert\". By virtue of Section 29A, any person either individually, or acting jointly or in concert with such other person who falls within the purview of disqualifications under Section 29A, was disqualified from the submitting a resolution plan. “Person acting jointly or in concert” has not been defined under IBC and hence, the wide gamut of person which falls within the scope of Section 29A creates operational difficulties.
Furthermore, though the relaxation given to MSME is a mindful move, the larger problem of increasing NPAs will hardly be effected since MSME form a very meager part of the bigger picture. The Ordinance gives relief to the homebuyers but has not taken into consideration the pending litigations in relation to the claims of financial institutions wherein they are asserting that since loans are advanced to the homebuyers are by financial institutions, it is them who should form a part of the Committee of Creditors. All in all, the Ordinance is a step in the right direction, but to resolve the practical difficulties faced while implementing IBC, there is a long way to go.
The article has also been co-authored by Ms. Aanchal Lamba, (Associate).