The Insolvency and Bankruptcy Code, 2016 (hereinafter to be referred as the “Code“) nearly after two years of its operation has undergone some significant amendments by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2018 (hereinafter to be referred as the “Ordinance“). The ordinance was aimed at strengthening the Corporate Insolvency Resolution Process (hereinafter referred to as the “CIRP“). The objective of the Ordinance is “to balance the interests of various stakeholders in the Code, especially the interests of home buyers and micro, small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants”. The President of India promulgated the Insolvency Ordinance on 6 June 2018 which has made substantial changes to the Code including but not limited to the categorization of the homebuyers as financial creditors and it also clarifies that whether the proceedings against the guarantors fall within or outside the CIRP.
OVERVIEW OF AMENDMENTS
1. CATEGORIZATION OF HOME BUYERS AS FINANCIAL CREDITORS
Arguably the most important and significant change brought about by the Ordinance is the categorization of the home buyers as Financial Creditors, this is important since it was being seen that the home buyers were being left high and dry when it came to playing a part in the decision making process of the CIRP. The same has been done by expanding the definition of “financial debt” which has been expanded to include any amount raised from an allottee under a real estate project which shall be deemed to be an amount having the commercial effect of a borrowing for the purposes of Section 5(8) (f ) of the Code. The implication of the same is that homebuyers will now be treated as ‘financial creditors’ and form a part of the committee of creditors of a corporate debtor (the “CoC“) and play a part in the decision-making process, which includes determining the CIRP of a corporate debtor, including whether to accept or reject a resolution plan. The classification as a ‘financial creditor’ also enables homebuyers to initiate the CIRP against large real estate houses.
2. INITIATION OF INSOLVENCY RESOLUTION PROCESS BY OPERATIONAL CREDITORS
There exists a distinction in the process of initiating the CIRP by the financial creditors and the operational creditors. The financial creditors can initiate the CIRP by directly filing the application with the National Company Law Tribunal (hereinafter to be referred as the “NCLT“), on the occurrence of a default, unlike the ‘operational creditors’ who were first required to deliver a demand notice (and invoices) to the corporate debtor, under Section 8 of the Code, who had 10 days to either pay off the debt or notify the creditor of the existence of a dispute and provide a record of the pendency of the suit or arbitration proceedings filed before the receipt of the notice. The operational creditor also had to file a certificate from their banker to certify that no amount had been received from the corporate debtor to satisfy the operational debt, now this requirement has been made optional by this Ordinance, the certificate is to be filed only if the same is available. Also the Ordinance has also reduced the requirement of the corporate debtor to provide evidence of any pending suit or arbitration proceedings and it has been clarified that an operational creditor will be barred from filing an application for initiating the insolvency resolution process if a dispute exists but is yet to be filed before the courts or an arbitration tribunal.
3. VOTING THRESHOLDS FOR DECISION MAKING BY THE COC
Before the Ordinance came into force, all the decisions of the Committee of Creditors (CoC) had to be approved by a majority vote of 75% of the voting shares. Important decisions such as the extension of the time period for the completion of the CIRP, replacement of the Insolvency Resolution Professional (hereinafter to be referred as the “IRP“), and more pertinently the voting percentage for the approval of the resolution plan were subject to this high threshold, the same has been now lowered to 66% by this amendment .The objective behind this amendment is to avoid those unfortunate situations of liquidation where even though the proposed resolution plan was approved by a majority of the CoC members, the corporate debtor still went into liquidation as the voting percentage fell slightly short of the 75% figure and also to ensure that the object of the ordinance that is to promote resolution over liquidation is kept intact.
4. APPLICABILITY OF MORATORIUM TO GUARANTORS
There were various conflicting judgments of the NCLT and the NCLAT on the issue that whether the moratorium as envisaged under Section 14 of the Code applies to the assets of the guarantors of the corporate debtor as well or not. This amendment has laid this controversy to the rest, it has been categorically laid down by this amendment that the assets of the guarantor are outside the purview of the Section 14 and thereby no moratorium would be applicable.
5. SECTION 29A OF THE CODE
Prior to the amendment it was commonly observed that since Section 5(25) initially allowed, ‘any person‘ to submit the resolution, the promoters of the corporate debtors themselves submitted a resolution plan in the CIRP for their own distressed company and be the resolution applicant themselves. This was hazardous and defeating the purpose of the Code because, it envisaged a situation that the defaulting promoters could buy the assets of the distressed corporate debtor at very steep discounts. To prevent this malpractice, Section 29A was inserted. In a nutshell, Section 29A sets out the disqualification criteria for the resolution applicant. Amendments to section 29A have been introduced to bring more clarity to the eligibility criteria for submission of resolution plan. By inserting the meaning of “financial entity”, who would not fall afoul of the eligibility criteria on account of it being a “related party” (proviso of Explanation I and newly inserted Explanation II after clause (j) in section 29A), further the ordinance also provides for exemptions to the promoters of the Micro, Small and Medium Enterprises (MSMEs) from being barred from bidding during the CIRP , it is hoped that this will result in more participation by prospective resolution applicants in the resolution process;
6. LIMITATION ACT TO APPLY TO THE CODE
The amendment has also settled the position on the issue of applicability of the Limitation Act, 1963 (hereinafter to be referred as the “Limitation Act“) to proceedings under the Code, the Ordinance provides that the Limitation Act shall be applicable on proceedings and appeals filed under the Code.
The amendment has brought in a slew of positive changes to the Code, which will significantly boost the framework of insolvency resolution as had been envisaged under the Code. The notable changes as discussed above, including but not limited to the recognition of the home buyers as financial creditors, amending Section 29A, reducing the threshold in the CoC, the automatic continuation of the resolution professional, once a resolution plan is submitted under Section 30(6) will surely help in fulfilling the aim and objectives of the Code.
Source: July 23, 2018, Mondaq