By Vinod Kothari, (firstname.lastname@example.org)
The Presidential Ordinance to amend the Insolvency and Bankruptcy Code tries to address a few concerns, which seem to have been noticed in the early stages of resolution plans being approved by creditors’ committees. Essentially, under the scheme of the Code, a resolution plan may be submitted by a “resolution applicant”, who can be any person proposing a resolution alternative. The resolution applicant may, therefore, be the existing management itself, or may be a potential acquirer. Sometimes, the potential acquirer comes with a masked identity, and the true acquirer is hiding somewhere behind the screen. The true acquirer might be the existing promoters themselves, or may be someone else.
Amendments to the Corporate Insolvency Process regulations were recently made vide a notification dated 7th Nov 2017, requiring a resolution applicant to provide details about the identity of the acquirer. The amended regulations also provided that if there was a likely change in the management of the acquirer during the implementation process, then the identity of the incoming management also needs to be provided.
However, more significantly, the changes in the regulations, made in early November, were focused on tracking what is known as “vulnerable transactions” – transactions such as preferential transfers, undervalued transactions or fraudulent transactions – which typically happen in anticipation of a bankruptcy.
Presently, the Ordinance tries to legislate what was substantially already covered by the changes in the Regulations. However, the Ordinance provides a statutory basis to the amended regulations.
Significantly, the amendments provide for a negative list of resolution applicants – which includes a willful defaulters, or persons who already have an NPA-classified accounts in their fold. The negative list also includes people who might have guaranteed the obligations of the corporate debtor who is currently in insolvency – thereby disentitling promoters, or group companies from being eligible as resolution applicants.
It seems that the law is generally not in favour of a resolution application being moved by the existing promoters –so that the resolution process does not become an alibi for so-called one-time settlements.
Feasibility of the resolution plan:
Amendments to sec. 30 (4) of the Code seek to obligate the committee of creditors to express views on feasibility and viability of the resolution plan. The IBBI also gets powers to lay further conditions that the resolution plan will have to adhere to.
Impact of the amendments:
Implementation of Insolvency Code is a learning process – the drafting of the law left lots of gaps which are surfacing over a period of time. There are no experiences being gained. One of the learning which is still to come is – what is the best way of implementing a resolution plan – through a change of legal entity, or while retaining the legal entity. If the legal entity is retained, there may be potential statutory liabilities or other obligations pertaining to the period before the resolution plan. On the other hand, if there is a change of entity, by an order of demerger or merger, there are stamp duty implications. There is a strong reason for making amendments to the Indian Stamp Act to exempt stamp duty in such cases.
Gist of the amendments
- Clause (e) of section 2 of the Code has been substituted with three clauses. This would facilitate the commencement of Part III of the Code relating to individuals and partnership firms in phases.
- Clause (25) and (26) of section 5 of the Code which define “resolution applicant” and “resolution applicant” are amended to provide clarity.
- Section 25(2)(h) of the Code is amended to enable the resolution professional, with the approval of the committee of creditors (CoC), to specify eligibility conditions while inviting resolution plans from prospective resolution applicants keeping in view the scale and complexity of operations of business of the corporate debtor to avoid frivolous applicants.
- Section 29A is a new section that makes certain persons ineligible to be a resolution applicant. Those being made ineligible inter alia include
- willful defaulters,
- those who have their accounts classified as non-performing assets for one year or more and are unable to settle their overdue amounts include interest thereon and charges relating to the account before submission of the resolution plan,
- those who have executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor undergoing a corporate insolvency resolution process or liquidation process under the Code
- and connected persons to the above, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons.
- It has also been specifically provided that CoC shall reject a resolution plan, which is submitted before the commencement of the Ordinance but is yet to be approved, and where the resolution applicant is not eligible as per the new section 29A. In such cases, on account of the rejection, where there is no other plan available with the CoC, it may invite fresh resolution plans.
- Section 30(4) is amended to explicitly obligate the CoC to consider feasibility and viability of the resolution plan in addition to such conditions as may be specified by IBBI, before according its approval.
- The sale of property to a person who is ineligible to be a resolution applicant under section 29A has been barred through the amendment in section 35(1)(f).
- In order to ensure that the provisions of the Code and the rules and regulations prescribed thereunder are enforced effectively, the new section 235A provides for punishment for contravention of the provisions where no specific penalty or punishment is provided. The punishment is fine which shall not be less than one lakh rupees but which may extend to two crore rupees.
- Consequential amendments in section 240 of the Code, which provides for power to make regulations by IBBI, have been made for regulating making powers under section 25(2)(h) and 30(4).
To view The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017 please click here