Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 Quick review of Proposed Amendments

where the IRP is not appointed in the order admitting application under section 7, 9 or 10, the ICD shall be the date on which such IRP is appointed by the AA

While there have been a very few cases where such time lag has existed, it must be noted that where it may so happen that IRP was not appointed on the very same day as admission, it becomes necessary to consider the CIRP commencement only from such date of appointment.

Interestingly, the deemed commencement of CIRP from the date of appointment of CIRP only, was not provided for in the Code originally, and was only inserted by way of amendment dated 06.06.2018.

“interim finance” means any financial debt, and such other debt as may be notified, raised by the resolution professional during the insolvency resolution process.

While “such other debt” has been defined as of now, it leaves the window open for inclusion as may deem fit by the government.

In view of the amendments with respect to identification of “essential goods”, it is expected that the term “such other debts” shall include debt for ensuring availability of such essential goods which may be identified by the RP as critical.

(i)     Application for initiation of CIRP can be filed only when such application is filed jointly by atleast:

(a)    100 of such creditors in the same class; or

(b)    10% of the total number of creditors in that class

Whichever is less.

(ii)   In case of application by allottees of a real-estate project, application has to be jointly filed by atleast:

(a)    100 of such allottees under the same project; or

(b)    10% of the total number of allottees of the same real estate project,

Whichever is less.

(iii) Where the application by such creditors as mentioned in (i) and (ii) above is not admitted before commencement of the Amendment Act, the application is required to be modified in terms of the aforesaid proviso, failing which it shall be deemed to be withdrawn before admission.

Also observed by the Adjudicating Authority and Appellate Authority in several instances, this risk of frivolous initiation of insolvency proceedings was no new-comer.

Hence, to mitigate the risk of frivolous application while also keeping the doors open, the Amendment Bill has provided for a minimum threshold which has to be met so as to make the application.

Note that in case of home-buyers, the applicants shall related to the same real estate project. This means – if a company has several real estate projects floating, the allottees cannot cumulate across the projects to fulfil the threshold criteria to initiate the application.

The provisos shall be complied with in cases where applications have not been admitted yet. Hence, for applications already admitted, the admission cannot be reversed. The provisos are not retrospectively applicable.

Hereby clarified that

nothing in this section shall prevent a corporate debtor rendered ineligible under this section, from initiating CIRP against another corporate debtor.

Thus, in order to establish the true intent and to remove the anomaly regarding validity of an application filed by the RP or Liquidator of a corporate debtor against another corporate debtor, the Amendment Bill has provided the said clarification.

A license, permit, registration, quota, concession, clearances or a similar grant or right given by the CG, SG, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;

The flexibility so provided, ensures adherence to the guiding objectives of the Code, as well as maintains a parallel fair-mindedness by imposing pre-conditions for enjoying the benefit of this clarification.

The supply of goods or services that the IRP or RP, as the case may be, considers critical to protect and preserve the value of the corporate debtor and manage the operations of such CD as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except if such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be

specified.

This again comes with the rider that such goods/ services may be stopped if payment towards the same has not been made by the corporate debtor, for supply during the moratorium period or in such circumstances as may be specified.

This new section leaves it upon the discretion of the RP to decide which goods/ services shall be construed to be of critical nature, without however, providing any parameter/ guidelines based on which the same can be determined.

IBBI may be expected to clarify this in the regulations.

such transaction as may be notified by the Central Government in consultation with any financial regulator

Provisions of section 14 (1) shall not be applicable to:

such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.

This shall provide a wider coverage of transactions on which benefits of moratorium cannot be enjoyed.

IRP to be appointed on the insolvency commencement date

It is likely that the said amendment has come in light of the panel of insolvency professionals maintained with Insolvency and Bankruptcy Board of India.

Provided further that the first proviso shall not apply to a FC, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date

Provided further that the first proviso shall not apply to a FC, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, or completion of such transactions as may be prescribed, prior to the insolvency commencement date

Provided that the RP shall, if the resolution plan under section 30 (6) has been submitted, continue to manage the operations of the corporate debtor after the expiry of CIRP period until an order is passed by the Adjudicating Authority under section 31.

Provided that the RP shall continue to manage the operations of the corporate debtor after the expiry of CIRP period, until an order approving the resolution plan under section 31 (1) or appointing a liquidator under section 34 is passed by the Adjudicating Authority

However, the law is still silent on the status of CoC.

For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a FC of the CD and is a related party of the CD solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.

For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a FC of the CD and is a related party of the CD solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, or completion of such transactions as

may be prescribed, prior to the insolvency commencement date

This in turn narrows the scope of related party of a resolution applicant for determining eligibility under section 29A of the Principal Act.

Provided further that the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a FC of the CD and is a related party of the CD solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date

For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a FC of the CD and is a related party of the CD solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, or completion of such transactions as

may be prescribed, prior to the insolvency commencement date

(discussed below)

Detailed analysis of the same has been discussed in our article Abolution of Resolution[2]

Notwithstanding anything to the contrary examined in this Code or any other law for the time being in force, the CG may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.

Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the CG may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.

For the removal of doubts, it is hereby clarified that the insolvency and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.”

(fa) the transactions under the second proviso to sub-section (2) of section 21

(fb) the transactions under the Explanation I to clause (c) of section 29A

(fc) the transactions under the second proviso to clause (j) of section 29A.

(ia) circumstances in which supply of critical goods or services may be

terminated, suspended or interrupted during the period of moratorium under subsection

(2A) of section 14.