30 March 2019: The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) undergoes to second amendment to ensure enforcement of the provisions of the Code aiming towards the fulfilment of its objective of time-bound resolution process. These amendments will make easier effective implementation and obtain desired results.
Following are the significant amendments introduced in the 2018:
(a) Home Buyers are recognised as Financial Creditors
In the matter of Jaypee Infratech Limited, the Supreme Court held that, home buyers have now been recognized as “financial creditors” under the IBC. This amendment has been carried out keeping in mind the peculiarity of under construction apartments in India where almost 25% to 30% of the projects face various delays causing suffering to home buyers.
Since the monies raised by home buyers are a means of raising finance for construction, and on failure of the project the monies are require to be returned based on the time value of money, it has been decided to treat homebuyers as financial creditors.
Accordingly, Section 5(8) of the IBC Code has been amended to clarify that homebuyers are financial creditors and can initiate corporate insolvency resolution process (“CIRP”) against defaulting developers under Section 7 of the IBC code. This also gives them the opportunity to be a part of the Committee of Creditors (“CoC“) and contribute to the decision-making during the CIRP.
(b) Withdrawal of CIRP Application with the approval of 90% of CoC members
The newly inserted Section 12A of the Code provides for withdrawal of application after admission, if the same is approved by at least 90% of the CoC members.
Prior to the Act, withdrawal of application after initiation of CIRP was not permitted, as CIRP once initiated cannot be rolled back. Considering the preference of resolution over liquidation and settlement over resolution, it was realized that there might be a situation wherein the Corporate Debtor agrees to settle the dues with its creditors by way of an out-of-court settlement; and thus, if at least 90% of the CoC gives assent to such withdrawal, the same shall be allowed.
(c) Extension in the tenure of IRP till the appointment of RP
Once CIRP is initiated, the Board and Management of the Corporate Debtor stands suspended and the control shifts to the hands of the IRP/ RP. Section 16(5), of the Code provides that the tenure of the IRP (Interim resolution professional) shall not exceed beyond thirty days of his appointment, whether or not the RP is appointed. Thus, in situations where the RP was not re-appointed within the tenure, it was considered as expired; the Corporate Debtor was technically left un-administered.
Thus, to make up for this lacuna, Section 16(5) of the Code has been amended to provide that the tenure of IRP shall continue till the RP is appointed.
(d) Requirement of special resolution in self-filing cases under section 10 of IBC
Section 10(3)(c) of the Ordinance provides that in case of self-filing of Application u/s 10 of the Code for initiation of CIRP, a Special Resolution (SR) must be passed by the shareholders of the Corporate Debtor.
Prior to this Amendment, filing of such application was decided upon among the directors of the Corporate Debtor themselves. Hence, to rule out chances of maltreatment of this power bestowed upon the directors by the Code and to prevent the BOD (board of directors) of the Corporate Debtor from taking a unilateral decision in this regard, this provision was introduced by way of the Ordinance.
(e) Reduction in voting percentage for key decisions
As per the Code, for decisions concerning the resolution process, there existed a voting threshold of at-least 75%. However, a voting threshold as high as this was frustrating the essence of the Code.
For example, “Resolution over Liquidation”, it was observed that Resolution Plans were not approved by the Committee of Creditors (COC). It was finally in the case of Synergy-Dooray, the NCLT’s Hyderabad Bench passed an order for approval of Resolution Plan with 66% votes in favour. Thus, with a view to effectuate a smoother CIRP, voting thresholds were reduced from 75% to 66% and 51% for serious decisions and routine matters respectively.
(f) Moratorium under CIRP
Section 14(3) (b) provides that moratorium during CIRP shall not apply to a guarantor in a contract of guarantee to the corporate debtor (guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP).
- Creditors can invoke personal or corporate guarantees during the CIRP.
- Will provide better co-operation from promoters during resolution process.
(g) Resolution Professional (RP) responsible for on-going legal compliances
Under Section 17(e) provides that RP shall be responsible for complying with requirements under any law for the time being in force on behalf of Corporate Debtor.
- RP to ensure compliance with all the laws for the time being in force viz. Companies Act 2013, SEBI regulations, factories act, labour related laws, etc. on behalf of the Corporate Debtor.
- This was already emphasized by IBBI circular dated 3 January 2018.
(h) Limitation On Insolvency And Bankruptcy Code, 2016: No Phantom Claims Allowed
In the matter of B.K. Educational Services Private Limited v Parag Gupta, the apex court held that, Section 238A provides for the mechanism to apply the the provisions of Limitation Act 1963 to applications made under IBC 2016.
- Applications for default of time barred debt would be ineligible under IBC.
(i) Insertion of new section 29A. Persons not eligible to be resolution applicant.
In the case of Essar Steel India Limited, the Supreme Court of India not only interpreted Section 29A of the Insolvency and Bankruptcy Code, 2016 in depth, but also threw light on certain ambiguities relating to its applicability. The following amendments were suggested by the court:-
- Persons controlling accounts which have remained Non-Performing Assets (NPA) in excess of one year at the time of submission of resolution plan.
- Disqualification shall not apply to financial entities which are not related parties to Corporate Debtor.
- This clause is not applicable to a resolution applicant who has acquired a NPA through corporate insolvency resolution process during the last three years before the date of submission of resolution plan.
- Conviction for two years or more would be ineligible only if the offense relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC
- Conviction for seven years or more would be ineligible irrespective of statute.
- Section 29A (d) will not apply if more than two years have elapsed from the date of release from imprisonment.
The definition of “financial entities” now includes the following additional classes of entities:
(i) Any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and
(ii) Any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017.
As per Section 30(1), the resolution applicant shall submit resolution plan along with an affidavit stating they are eligible u/s 29A.
- Onus shifted to resolution applicant to state its eligibility u/s 29A.
- RP/CoC may not have to go overboard in investigating 29A compliance from a completeness standpoint.
(j) Management of the Corporate Debtor from end of CIRP till approval of Plan
Section 23 Resolution Professional shall continue to manage operations of the Corporate Debtor even after the end of 180 / 270 days period if the Resolution plan is submitted to NCLT.
(i) Eliminates any ambiguity between the role of RP/ suspended board after the CIRP period.
(ii) Ensures preservation of value in the Company until the resolution plan is approved by NCLT.
(k) Shareholding by virtue of conversion of loan into equity shall not be treated as Related Party.
Section 21(2) provides that those persons, who became a “related party” solely on account of conversion of any loan or debt into equity, shall be exempted from the prohibition of being a Resolution Applicant. The very rationale behind such exemption is that conversion of loan/ debt into equity after a particular time-period or on happening of any trigger event happens to be a very common clause of several loan/ debt agreements executed between the lender and borrower. Thus the conversion that takes place is only on account of an agreement which was essentially of a debt nature.
Some Landmark Judgments In The Year 2018:
(i) In B.K. Educational Services Private Limited v. Parag Gupta and Associates, a division bench of SC held that, the Limitation Act, 1963 will apply to applications that are made under s. 7 and s. 9of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on and from the commencement of IBC on 01.12.2016. The SC has through this judgment clarified that IBC proceedings cannot be initiated based on time barred claims.
(ii) In Binani Industries Limited v/s Bank of Baroda, the NCLAT held that the maximisation of the value assets of Corporate Debtor cannot be ignored and interests of all stakeholders are to be taken into account in the resolution plan.
(iii) In State Bank of India v. MBL Infrastructures Ltd., the NCLAT held that Section 61 clearly stipulates that an appeal has to be preferred within 30 days from the order of the adjudicating authority but a delay not exceeding 15 days can be condoned in filing the appeal if the appellant is able to satisfy the appellate authority that there was sufficient cause for not filing the appeal within the prescribed period of 30 days.
(iv) In Indiabulls Housing Finance Ltd. v. Shree Ram Urban Infrastructure Ltd., the NCLAT held that such an application would not be maintainable on the ground that the stage of corporate insolvency resolution process is a stage prior to that of liquidation or winding proceedings. Hence, once the second stage proceedings have already initiated, the question of reverting back to the first stage of corporate insolvency resolution process or preparation of resolution plan does not arise.
The objective of the amendment primarily is to prevent un-scrupulous persons from misusing or vitiating the provisions of the code. The amendment has been designed to fine-tune and streamline the CIRP and deal with many of the contentious issues raised under it. Amendments ensure transparency in the CIRP by imposing strict eligibility criteria for being a resolution applicant and presenting a resolution plan and by introducing multiple layers of safeguard. It also attempts to remove backdoor entry of un-scrupulous promoters. Such wide scope of disqualifications will restrict the number of participants in the CIRP but improves its credibility.
Further, the recognition given to the homebuyers shall prove to be a strong deterrent for promoters and real estate developers from raising huge amounts from unsuspecting home-buyers foe real estate projects and defaulting on their commitment.
Moreover, it will be intriguing to see how promoters, who have defaulted because of factors beyond their control such as genuine poor business performance and now, are ineligible to submit resolutions plans, choose to react to Amendment act. Overall all amendments have brought about ample clarity qua the leniency extended to Micro, Small & Medium Enterprises (MSME’s) by the code.
Rahul Kanoujia and Mayank Gupta, Students at GNLU, Gandhinagar
Categories: Legal update