This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.
Date: 31 December 2019
An Insight into recent amendments to Bankruptcy Code
The Insolvency and Bankruptcy Code, 2016 (“Code”) was enacted in the year 2016 to overhaul the insolvency regime in India by providing a time-bound process for resolution of insolvency of companies, and thereby changing debtors’ attitude towards repayment of credit enjoyed by them. Since its enactment, Government has amended the law multiple times to address deficiencies and over turn bottlenecks coming in the way of implementing the law. In order to further strengthen the insolvency regime, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced in the Lok Sabha on December 12, 2019, but it could not be taken up. Since the parliament is not in session now, the President of India has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (“Ordinance”) on December 28, 2019 to further amend the Code. An ordinance has the same effect as an Act of the Parliament. However, it cease to operate either if Parliament does not approve it within 6 weeks of reassembly, or if disapproving resolutions are passed by both Houses. Key Highlights of the Ordinance:
1. Immunity to the Corporate Debtor:
The liability of a corporate debtor for an offence committed prior to commencement of insolvency proceedings shall cease and corporate debtor shall not be prosecuted for such offence with effect from the date of approval of resolution plan. Any pending proceedings against corporate debtor shall also stand discharged from the said date. Further, no action shall be taken against the property of corporate debtor which is covered under resolution plan. However, the promoters and officers in default shall continue to be liable for prosecution and punishment under law. The immunity shall only be available if resolution plan results in change of control or management of corporate debtor to a person other than promoters, persons in management or control of corporate debtor, related parties or persons who abetted or conspired for commission of offence. The risk of prosecution and attachment of company’s assets for offences done by existing promoters and management acts as a deterrent factor for resolution applicants to invest money in companies under insolvency. This creates favorable situation for existing promoters and management who fearlessly continue to manage the corporate debtor in a manner detrimental to the interest of creditors and other stakeholders. The immunity will bring certainty for resolution applicants as the resolution plan is framed after considering the value of assets and liabilities of the corporate debtor. The immunity will ensure that there are no hidden liabilities or threat to the assets which will come up in future.
2. Minimum threshold of creditors in class for initiating Insolvency Resolution Process against Corporate Debtor
The Ordinance has brought in minimum threshold for initiating insolvency proceedings against the corporate debtor by home buyers or other class of creditors. The threshold is 100 creditors in same class or 10% of total number of creditors in same class, whichever is less. In case of home buyers, threshold is 100 allottees under the same real estate project or 10% of total number of allottees under the same real estate project, whichever. Further, pending applications will be modified within thirty (30) days from commencement of the Ordinance, failing which the same will be deemed as withdrawn before its admission. This will bring a great relief to the developers as completion of their real estate projects often gets stalled due to filing of multiple insolvency petitions by home buyers one after the other. However, it will make things slightly difficult for home buyers as they will have to come together to take collective action against the errant developers.
3. Initiation of insolvency proceedings by corporate debtor against another corporate debtor:
The Ordinance has removed disqualifications enshrined under Section 11 insofar as initiation of insolvency proceedings by a corporate debtor against another corporate debtor is concerned. Hence, the following corporate debtors can now initiate insolvency proceedings against another corporate debtor:
Corporate debtor having completed insolvency proceedings 12 months preceding date of application.
Corporate debtor having violated terms of resolution plan approved 12 month preceding date of application.
Corporate debtor in respect of whom a liquidation order has been passed.
The trade receivables are not considered as valuable asset when it comes to any corporate debtor under insolvency and it becomes almost impossible to recover such dues when such such corporate debtor is restricted from taking the insolvency route. This amendment will allow such corporate debtors in their capacity as creditors to recover their dues from other corporate debtors which will in turn help in maximization of assets.
4. More breathing space to corporate debtor during moratorium
In order to help running the business of corporate debtor as a “going concern” and maximizing the value of assets, the Ordinance has introduced a non-obstante clause to prohibit the following during moratorium period:
Government and its authorities shall not terminate or suspend licenses, permits or other clearances etc. of the corporate debtor on the ground of insolvency provided that there is no default in payment of dues.
Vendors shall not terminate, suspend or interrupt supply of such goods and provision of such services which according to the resolution professional are critical to protect and preserve the value of corporate debtor and manage operations of corporate debtor as a going concern on the ground of insolvency provided that there is no default in payment of dues.
The value of a corporate debtors in many cases is based on the licenses and permissions obtained by it for running its business. The new law seeks to ensure that value of such licenses and permission remains intact during the resolution process, which in turn will help in maximization of its assets and attract more resolution applicants. The supply of critical goods and services will help in running the business of corporate debtor as a going concern without any obstructions till resolution is reached.
5. Changes regarding Resolution Professional:
As per the Ordinance, the order admitting application for initiation of insolvency proceedings shall mandatorily include the appointment of interim resolution professional.
The resolution professional is required to continue to manage the affairs of the corporate debtor after expiry of corporate insolvency resolution process period till the resolution plan os approved or a liquidator is appointed.
CRI Comment: This is yet another move by the Government of India to change the rules of the game which clearly shows its commitment towards creating an insolvency regime which is constantly evolving with the changing times and challenges faced during its implementation. However, inserting a new requirement of minimum threshold for certain categories of creditors may invite various practical difficulties and legal challenges besides being subjected to constitutional validity test.
Chambers of Rajan & Indraneel
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Chambers of Rajan & Indraneel is a premier full service law firm headquartered at New Delhi, India. The Firm represents amalgamation of vast experiences and practices of two eminent lawyers. Indranil Ghosh is highly reputed as a disputes lawyer. He was a senior partner and head of litigation practice in one of the oldest Indian law firm Fox Mandal for several decades before setting up his own practice. Rajan D Gupta is a rank holder Chartered Accountant turned Corporate Lawyer. He is also a licensed Insolvency Resolution Professional. He has been associated with internationally renowned big law firms in past and has held senior level positions in firms like PwC, Fox Mandal, Khaitan & Co. and SRGR Law, etc. before starting the Firm.
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