By Sikha Bansal,(email@example.com) (firstname.lastname@example.org)
Post the Insolvency Law Committee’s Report recommending an overhaul in the Insolvency and Bankruptcy Code, 2016, the Government has passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, vide Notification dated 6th June, 2018, in an attempt to set things right. No doubt, IBC has triggered positive vibes in the lending market, yet being an evolving law, it has its own drawbacks.
The Ordinanceis the second ordinance in respect of this legislation; which, among several other amendments, seeks to provide first-aid for the burns given by the first ordinance passed 6 months ago in November, 2017 [later enacted as IBC (Amendment) Act, 2018, with modifications] in the form of section 29A.
Below is an overview on the Ordinance.
The Ordinance is meant to take effect “at once”. It means that the provisions shall have immediate effect; however, there is no specific provision contemplating it to take effect retrospectively. Hence, the provisions shall be effective prospectively.
The above implies that the provisions of the Ordinance will apply to ongoing proceedings with prospective effect. Any decisions/action taken prior to promulgation of the Ordinance will not be rendered invalid/ineffective due to these prospective changes. The changes as to section 29A too are prospective and do not apply to resolution plans submitted before the Ordinance.
The amendments triggered by the Ordinance, by their very nature can be classified as — (1) Clarificatory, i.e. those which merely clarify what was implicitly existing in the Code; (2) Curative, i.e. those amendments which are aimed at “curing” the side-effects of some provisions of the Code; and (3) Substantive, which alter specific rights, responsibilities of the parties in the process. Each one of these are discussed as follows –
1. “Repaid” vs. “Paid”
The ILRC, in the context of definition of “operational debt” under section 5 (21) of the Code, recommended replacement of the word “repayment” by the word “payment”, as the latter carries wider import. The word ‘payment’ is a wider term which means “performance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation”. The term ‘repay’ means “to pay back” or “refund” and the term ‘repayment’ means “the act of repaying”. The change is mere clarificatory – if one fails to pay “interest”, it is default in “payment” of interest, and not “repayment” of interest. While principal is “repaid”, interest is “paid”.
Accordingly, the Ordinance replaces the word “repaid” by “paid” in various provisions of the Code such as section 3(12), section 8(2)(b), explanation to section 8, section 9(5)(i)(b), section 9(5)(ii)(b), etc.
2. Scope of “Dispute”
Amendment [Clause 5]: Change has been made in section 8(2)that the corporate debtor shall bring to the notice of the operational creditor, existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings, i.e. the word “and” has been replaced by “or”.
Comments: The amendment liberalizes the interpretation of the word “dispute”. As per section 8 of the Code, an operational creditor is required to deliver a demand notice on occurrence of a default. In order to avoid any further proceeding from the side of the operational creditor, the corporate debtor shall bring to the notice of the operational creditor the “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute”. The amendment replaces the word “and” by “or”. Hence, the existence of dispute need not be in the form of pendency of suit or arbitration proceedings only.The amendment, in effect, incorporates the judgement of the Hon’ble Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited.Therefore, the definition of the term ‘dispute’ in section 5(6) has to be read as an inclusive, and not an exhaustive definition.
3. Procedural relaxations for OCs initiating CIRP
Amendments [Section 6]: Section 9(3) has been amended to broaden and relax the documentation which is to accompany the application filed under section 9.
Comments:Section 9(3)(c) of the Code provides that an operational creditor shall, along with the application, provide a certificate from a financial institution maintaining the accounts of the operational creditor, confirming that no payment of an operational debt has been received from the corporate debtor. The clause has been a matter of debate in a number of cases the definition of ‘financial institution’ under section 3(14) does not include foreign banks and non-scheduled banks, thus creating a void for filing of applications by creditors with bank accounts in foreign or nonscheduled banks. The ILRC was of the view that the requirement provided in section 9(3)(c) be made optional and other means of proving non-payment of operational debt by corporate debtor, like records with IUs or any other such proof as may be notified by the Central Government, may be provided for. The ILRC referred to the decision of the Hon’ble Supreme Court in Macquarie Bank Limited v. Shilpi Cable Technologies Ltd. The amendment gives effect to the recommendation of the ILRC.
4.Disciplinary proceedings Against RP and Self-filing u/s10
Amendments [Section 7]: Section 10 (4) amended so as to include pendency of disciplinary proceedings against the proposed interim resolution professional as a ground for rejection of application under section 10.
Comments: While the criteria is explicit for section 7 and section 9 filings, there was a gap under section 10, which has been made good by the amendments.
5.Last date for filing claims in resolution
Amendments [Section 11]: Changes in clause (c) of section 15 (1) so as to provide that the public announcement shall state the last date of submission of claims, as may be specified.
Comments:This is statutory basis to the regulations. The CIRP Regulations, 2016 already specify that the last date of submission of claims shall be 14 days from the date of appointment of interim resolution professional.
6. Assets to be taken under control by Interim resolution professional
Amendments [Clause 14]: Change in explanation to section 18, so as to cover the scope of “assets” defined under the explanation to the entire section rather than a particular sub-section.
Comments:Wherever the word “assets” appear in section 18 specifying duties of interim resolution professional, the same shall be interpreted in terms of the explanation.
7. Appeal against “acceptance” of claims by liquidator
Amendment [Clause 27]: Section 42 modified to explicitly provide for appeals against acceptance of claims.
Comments: Section 42 provides for appeals against rejection of claims by the liquidator. The ILRC proposed that section 42 may be amended to include appeals from accepted claims.
This explicitly facilitates filing appeal by a creditor who objects to acceptance of claims of another creditor.
8. Preferential vis-à-vis Undervalued transactions
Amendment [Clause 28]: Reference to section 43 [preferential transactions] deleted in section 45 [undervalued transactions].
Comments:The linking of undervalued transaction with preferential transactions gave an idea that for a transaction to be undervalued, the transaction must be preferential at the first instance. The anomaly has been deleted.
It may be noted that preferential transactions are to be judged on the basis of “persons” involved; on the other hand, undervalued transactions are to be determined on the basis of “value” involved in the transaction.
9.Applicability of Limitation Act
Amendment [Clause 34]: The amendment legislates on the recommendation of the ILRC to insert a new section 238A to state that the provisions of the Limitation Act, 1963 shall, as far as may be, apply to proceedings or appeals under the Code before the NCLT or the NCLAT, as the case may be.
10. Sweep of Moratorium not to extend to Guarantors
Amendments [Clause 3 read with clause 10]: Insertion of definition of “corporate guarantor” as clause (5A) in section 5; and, Substitution of sub-section (3) of section 14, so as to exclude “a surety in a contract of guarantee to a corporate debtor” from the shelter of moratorium.
Comments:Note that the term “personal guarantor” has already been defined under section 5 (22). The assets of corporate guarantors or personal guarantors of the corporate debtor will not get the protection of stay provisions under section 14. Though co-extensiveness of the liability of the surety with that of the principal debtor is a cardinal principle imbibed in the law of contracts, there were some rulings which extended the roof of section 14 to the assets of guarantors too. This explicit exclusion will reinforce the principle and will enable the creditors to initiate action against the guarantors of the corporate debtor.
11. Related Party of an Individual
Amendments [Clause 3 (iv)]: Insertion of clause (24A) under section 5 to define “related party” in relation to an individual.
Comments: The Code defines “related party in relation to corporate debtor”; the Companies Act, 2013 defines “related party in relation to a company”. There was a gap in deciphering “related party of an individual”. The amendment fills the gap. This is one-of-its-kind definition. Borne out of necessity, the definition would be relevant while interpreting section 29A. “Related party” is a much wider term than “relative”. The definition includes not only relatives, but also entities to which the individual might be “related”.
12. Withdrawal of corporate insolvency resolution process applications
Amendment [Section 9]: Insertion of section 12A for withdrawal of corporate insolvency resolution process applications.
Comments:Presently, under rule 8 of the CIRP Rules, the NCLT may permit withdrawal of the application on a request by the applicant before its admission. The amendment provides for withdrawal post admission if the CoC approves of such action by a voting share of 90%. The withdrawal shall be in a manner as may be prescribed.
13.Tenure of Interim Resolution professional
Amendment [Clause 12]:Change in section 16 to provide that the interim resolution professional shall continue in office till the appointment of resolution professional.
Comments:The amendment extends the tenure of the interim resolution professional till the appointment of resolution professional. Note that the requirement of appointing resolution professional in the first meeting of committee of creditors has been retained. Therefore, the amendment has to be read in line with that provision.
14. Consent of Interim resolution professional/resolution professional/Liquidator
Amendment [Clause 16, 20, 26]: Clause 16 amends section 22 so as to require consent from interim resolution professional and resolution professional for continuation/appointment in office respectively. Clause 20 requires the consent of the proposed resolution professional who would be replacing the existing resolution professional. Clause 26 amends section 34 so as to require the consent of resolution professional to act as liquidator.
Comments: The ILRC proposed to amend various sections so as to require obtaining of consent by resolution professional at various stages – during appointment by committee of creditors, on replacement of existing resolution professional, on appointment of existing resolution professional as liquidator, on appointment of resolution professional as liquidator.
15. Continuation of resolution professional post corporate insolvency resolution process period
Amendment [Clause 17]: Proviso inserted in section 23 so as to allow and facilitate continuation of resolution professional in office post the closure of corporate insolvency resolution process period and until an order is passed by the adjudicating authority under section 31.
Comments:The amendment attempts to fill the gap which might exist in the intervening period between expiry of the corporate insolvency resolution process period and approval of resolution plan by the adjudicating authority. However, the amendment is silent on continuity of the CoC, and rights/duties/obligations of the resolution professional during this intervening period.
16. Affidavit of Eligibility under Section 29A
Amendment [Clause 23]: Section 30 amended to require the resolution applicant to furnish an affidavit stating that he is eligible under section 29A.
Comments: The concerns remain whether the affidavit will suffice; or an independent assessment of the eligibility will be required, and if so, who will do so.
17. Integration of Proceedings against Guarantors in a Common Forum
Amendment [Clause 29]:Section 60 has been amended so as to provide that the liquidation proceedings of a corporate guarantor and bankruptcy proceedings of a personal guarantor of a corporate debtor shall be filed before the adjudicating authority having jurisdiction over the proceedings in relation to the corporate debtor.
Comments:The ILRC noted that no link is present between the insolvency resolution or liquidation processes of the corporate debtor and the corporate guarantor, as is present in case of personal guarantor. The amendment facilitates a common bench of NCLT to deal with the insolvency resolution or liquidation processes of the corporate debtor and its personal or corporate guarantors.
18. Irrelevance of Time of Action for Transactions Defrauding Creditors
Amendment [Clause 30]: The words “On or after the insolvency commencement date” have been deleted from section 69 which prescribes punishment for transactions defrauding creditors.
Comments:A transaction defrauding creditors is punishable irrespective of the time during which such transaction took place. The words, prior to being omitted by the amendment, limited the scope of the provisionto transactions which were effected on or after insolvency commencement date only. This is going in line with general principle that fraud is a nullity forever and that there should be no look back period for fraudulent transactions.
19. Amendments in Section 29A
Amendment [Clause 22, 23, 38]: Clause 22 makes various amendments in section 29A.
Change in sub-section (4) of section 30 for insertion of proviso stipulating that the eligibility criteria as modified by the Ordinance will apply to resolution applicants who have not submitted resolution plans as on the date of commencement of the Ordinance.
The Twelfth Schedule has been inserted to enlist the laws for the purpose of section 29A(d).
Comments:The amendments are in line with the recommendations of ILRC and have been made so as to streamline the restrictive provision. See a discussion here: http://vinodkothari.com/blog/streamlining-section-29a/.
20. Inclusion of home-buyers in the category of financial creditors
Amendments [Section 3(ii)]: Insertion of explanation under clause (f) of section 5 (8), i.e. definition of “financial debt”, so as to include amount paid by allottees as deemed to be having commercial effect of borrowing and thus includible in the definition of “financial debt”.
Comments:Note that the amendment uses words “deemed to be”, which may imply that the amounts raised from the allottees under a real estate project may not be, in substance, a financial debt.
The amendment borrows definitions of allottees and real estate projects from the Real Estate (Regulation and Development) Act, 2016.
Given that the number of homebuyers for a particular corporate debtor may be in tens of thousands, it would be interesting to see the role of bankers/financial institutions vis-à-vis role of the home buyers in deciding the fate of the corporate debtor in the resolution phase.
Further, =in the event of liquidation, being a financial creditor is one thing, and being secured is another.The home buyers, in all probabilities, will be classified as “unsecured financial creditors” under section 53, i.e. still much below secured creditors (whether financial or not). Hence, the efficacy of the proposed change in serving the underlying objective will be tested in times to come.
21. Initiation of corporate insolvency resolution process by authorized representatives of financial creditors
Amendment [Clauses 4, 15, 18, 19]: Section 7 amended so as to allow “any other financial person, on behalf of the financial creditor, as may be notified by the Central Government” to make application to NCLT for initiation of corporate insolvency resolution process.
Further amendments in section 21 have been made to allow “class of creditors” exceeding specified number to be represented by an authorized insolvency professional.
Also, section 24 has been amended to require notices to be served to authorized representatives.
New section 25A has been inserted to provide for the rights of such authorized representatives to participate and vote in the meetings of CoC, in accordance with voting instructions received from creditors who they represent.
Comments: The ILRC recommended the intent of the Code was not to bar a guardian of a financial creditor, administrator or executor of estate of a financial creditor or debenture trustee and the like, to trigger insolvency of a corporate debtor, and be a part of the CoC. Further, an enabling provision to notify other entities who may file an application on behalf of financial creditors may be provided for in the Code.
The amendment accepts the recommendation as above. This provision will also enable the home-buyers [or, other class of creditors] to have an insolvency professional as their representative in the proceedings. However, such insolvency professional shall be appointed by the adjudicating authority on an application being made by the interim resolution professional, before the first meeting of the CoC.
These provisions seemingly indicate formation [though not actual] of a composite body of creditors within the CoC. It is stated that if the authorized representative represents several financial creditors, then he shall cast his vote in respect of each financial creditor in accordance with instructions received from each financial creditor, to the extent of his voting share. In the absence of prior instructions from the financial creditor, the representative shall abstain from voting.
22.Special resolution for initiating corporate insolvency resolution process by corporate applicant u/s 10
Amendment [Clause 7]: Sub-section (3) of section 10 amended so as to include the requirement of special resolution in self-filing cases.
Comments: Since commencement of CIRP is a major decision for the corporate debtor and may have a huge impact on its functioning or even lead to its liquidation, a special resolution passed by the shareholders of the corporate debtor or a resolution passed by at least three-fourth of the total number of partners of the corporate debtor is required.
23.Reduction in Voting Threshold of CoC
Amendments [Clauses 8, 15, 20, 21, 23, 25]: Section 21 amended so as to reduce the voting threshold to 51% from 75% for all matters except where otherwise specified. Section 12 amended so as to reduce the requirement of 75% majority approval to 66% for extension of time for corporate insolvency resolution process. Similarly, section 22 has been amended to require only 66% assenting majority for appointment of resolution professional. Under section 27, 66% of majority will be required to replace existing resolution professional. The same majority would be required for actions to be undertaken by the resolution professional under section 28, and for approval of resolution plan under section 30, and for deciding on liquidation under section 33.
Comments:The Ordinance provides for reduction in the cut-off majority for decision-making by CoC from 75% to 66% [for all critical decisions]. So, no more possible for a mere 26% of the members of the CoC to take the entity down to liquidation path. The move is therefore to incentivize resolution.
Further, there are several matters of routine nature which require approval of CoC. In routine matters, the limit has been reduced drastically from 75% to 51%, therefore easing out the processes for the resolution professional.
The above is tabulated below –
|Subject Matter||Current Threshold||Proposed Threshold|
|Approval of resolution plan – section 30||75%||66%|
|Extension of CIRP beyond 180 days – section 12||75%||66%|
|Replacement or appointment of RP – sections 22,27||75%||66%|
|Passing a resolution for liquidation – section 33||75%||66%|
|Actions by resolution professional with approval of CoC – section 28||75%||66%|
|Other routine decisions for continuing the Corporate debtor as a going concern by the RP/ IRP||75%||51%|
Statutory approvals under resolution plans
Amendment [Clause 24]: Section 31 amended. The resolution professional shall obtain necessary approvals required under any law for the time being in force within 1 year from the date of approval by NCLT or within such period as provided for under the law, whichever is later.
Comments:Regulation 37(l) of the CIRP Regulations states that a resolution plan shall provide for obtaining necessary approvals from the Central and State Governments and other authorities. The ILRC proposed that the Code should specify that the timeline will be as specified in the relevant law, and if the timeline for approval under the relevant law is less than one year from the approval of the resolution plan, then a maximum of one year will be provided for obtaining the relevant approvals, and section 31 shall be amended to reflect this. The amendment gives effect to the above.
The provision does not make it clear obtaining such statutory approvals within the specified time frame is a condition precedent for maintainability of the resolution plan or a mandatory obligation on the resolution applicant. The provisions are silent as to consequences which can follow if the resolution applicant fails to get regulatory approvals within the specified time frame – will it impact the continuation of resolution plan or will it be a mere liability on the resolution applicant.
Statutory compliances during corporate insolvency resolution process vis-à-vis resolution professional
Amendment [Clause 13]: In sub-section (2), clause (e) inserted to provide that the interim resolution professional shall be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.
Comments:The amendment incorporates the recommendation made by ILRC, which in turn was pursuant to the Circular issued by IBBI stating that the IRP/RP will be responsible for the statutory compliances while managing the affairs of the corporate debtor. However, it is important to note that the board of directors is not suspended during the corporate insolvency resolution process; it is only that their powers are intermittently suspended, and are under overall supervision of the resolution professional. It must also be clarified that the interim resolution professional/resolution professional shall not be held liable for any acts done without his knowledge/connivance and any acts which did not arise out of his conduct.
Shareholding by virtue of loan agreements not to lead to related party relationships
Amendment [Clause 15]: Amendments in sub-section (2) of section 21 providing that a financial creditor who is a related party of the corporate debtor shall not be allowed to participate, or vote in CoC meetings. However, regulated financial creditors who became a related party solely on account of conversion of debt into equity/instruments convertible into equity shall be exempted from the prohibition.
Comments: Regulated financial creditors who become “related party” to the corporate debtor merely on account on conversion of debt into equity shall be considered not to be related. Equity-holding did become an impediment for creditors in past [e.g. NCLT, Hyderabad Bench dismissed the petition of Srei Infrastructure Finance seeking status as “creditor” of Deccan Chronicle Holdings]. In effect, a creditor is to remain a creditor irrespective of subsequent conversion of loan into equity. Therefore, these creditors will get their seats in CoC meetings. However, does this indicate “revival of debts” and nullification of conversion of such debts into equity?
However, there is no clarification as to whether during liquidation of the corporate debtor (if that so happens), the concerned financial creditor would be entitled to repayment of debt which was converted into equity/convertible instruments pursuant to debt restructuring schemes.
Deemed Approval of Shareholders for Acts to be Done pursuant to Resolution Plan
Amendment [Clause 23]: Section 30 amended to waive away the requirement of shareholders’ approval as required under the Companies Act, 2013 or any other law for the time being in force, for implementation of actions under the resolution plan.
Comments:The amendment legislates the MCA’s clarificatory circular dated 25.10.2017 in the Code. Shareholders’ approval for acts in the implementation of the resolution plan shall be deemed to have been given, if so required under the Companies Act, 2013 or any other law for the time being in force. This, our view, might have adverse impact on minority rights.
Bar on jurisdiction of Civil Authorities over matters of IBBI
Amendment [Clause 33]: Section 231 has been amended to provide for bar of jurisdiction of civil courts/authorities in matters under jurisdiction of the adjudicating authority as well as the IBBI.
Comments:IBBI is an administrative regulatory body and not judicial body. Putting the matters under IBBI beyond the jurisdiction of courts seems to be an ambitious move.
While the constitutionality of NCLTs have been established through a long route of SC rulings; the constitutionality of such a provision is subject to doubts.
Exemption to MSME Promoters from clauses of section 29A
Amendment [Clause 37]: Section 240A has been inserted to relax clauses (c) and (h) of section 29A for resolution process of MSMEs. While clause (c) pertains to NPA criterion, clause (h) deals with guarantees in favour of creditors. The Central Government, by notification, relax other provisions for MSMEs. The definition of MSMEs has to be derived from the Micro, Small and Medium Enterprises Development Act, 2006.