By Sikha Bansal
The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 has been introduced in Rajya Sabha and will have a game-changing impact on the ongoing insolvency proceedings as well as the future of the Insolvency and Bankruptcy Code, 2016.
Major highlights of the bill are –-
1. Section 5(26) – Resolution may include merger/demerger
Resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern.
The amendment provides for an explanation so as to clarify that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.
Comments: The scope of ‘resolution plan’ was never prescriptive in the Code, as also suggested by BLRC. The CIRP Regulations [regulation 37] is presently broad enough to cover all possible solutions. Therefore, the amendment, as stated, is merely clarificatory.
2. Section 7(4) – Ascertainment of existence of default by Adjudicating authority in section 7 cases to be time bound or delay shall be reasoned
Section 7(4) requires that, in case of application by a financial creditor, the adjudicating authority shall ascertain the existence of default within 14 days of the receipt of application. Further, sub-section (5) requires the adjudicating authority to pass an order of admission/rejection of application.
The amendment, by way of insertion of proviso, requires that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.
Comments: The amendment seeks to put greater importance to timely disposal of cases filed by financial creditors. No such amendment has been made with respect to section 9 or section 10 applications. The Supreme Court in Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors. held that the time limit prescribed for admission/rejection of applications by adjudicating authority is directory in nature. The amendment, though does not reverse or affect the ruling of SC, yet tries to emphasise timeliness by imposing requirement to record reasons for delay.
3. Section 12 – Corporate insolvency resolution process to be MANDATORILY wrapped within 330 days
At present, the maximum period is 180 days, with a provision for one time extension of a maximum of 90 days.
The amendment, by way of proviso, requires the completion of the corporate insolvency resolution process within a maximum of 330 days. It includes any extension granted under section 12 and the time taken in legal proceedings in the resolution process. Further, all pending resolution processes which have not been completed within 330 days, shall be completed within 90 days of the commencement of the Amendment Act, 2019.
Comments: The amendment has come in an urge to ensure “timeliness”, as many cases have already crossed the 270-day deadline.
Notably, the time limit of 180 days + 90 days remains unchanged. It may imply that the intent is to provide an additional period of 60 days (330-270), as possible time taken for legal proceedings, etc. Given that the legal proceedings may cover proceedings right upto the stage of the Apex Court, imposition of such time frame after including time taken for legal proceedings seems to an ambitious step.
The amendment, seemingly, does not include the time period during which the resolution process might have been stayed by any court/tribunal.
4. Section 25A – Voting by authorized representative of financial creditors on the basis of decision of class
Section 25A(3) provides that an authorized representative representing several financial creditors 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. Further, if any financial creditor does not give prior instructions through physical or electronic means, the authorised representative shall abstain from voting on behalf of such creditor.
The amendment calls for insertion of sub-section (3A) in section 25, and is without contradicting sub-section (3). According to the amendment, an authorized representative representing financial creditors under section 21(6A) “shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent. of the voting share of the financial creditors he represents, who have cast their vote”.
In case of application under section 12A (withdrawal), the authorized representative shall cast votes in accordance with sub-section (3) only.
Comments: Pursuant to the amendment, the voting in respect of home-buyers shall be on “class” basis, where decision of more than 50% of the voting members of the class will bind other members of the class.
5. Section 30 – Treatment of operational creditors and secured creditors under resolution plan – “fair and equitable”
Section 30 presently provides for a minimum payment of liquidation value to operational creditors under the resolution plan. There is no clarification on distinction between a secured and an unsecured financial creditor. Further, there was no separate provision for dissenting financial creditors (though the same was present under the CIRP Regulations, but deleted pursuant to NCLAT ruling).
The amendment requires that –
(i) a minimum payment to operational creditors shall be made which shall be higher of liquidation value ascribable to them and resolution value (say) ascribable to them. Here, resolution value is the amount to be distributed under the resolution plan;
(ii) a minimum payment shall be made to dissenting financial creditors which shall be liquidation value ascribable to them,
(iii) it is clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.
(iv) the committee of creditors, while approving the resolution plan, shall have regard to the manner of distribution proposed which may take into account the order of priority amongst creditors as laid down in section 53(1), including the priority and value of the security interest of a secured creditor.
Consequential amendment has been made in section 240(2)(w) – that is, power of IBBI to make regulations in this regard.
On and from the commencement of the Amendment Act, 2019, the provisions as amended, shall apply to such corporate insolvency resolution processes where –
(i) where resolution plan has not been approved/rejected by the adjudicating authority;
(ii) where appeal has been preferred under sections 61/62;
(iii) where a legal proceeding has been initiated in any court against the decision of the adjudicating authority in respect of the resolution plan.
(i) These amendments will completely dilute the NCLAT ruling in Essar.
(ii) The amendments give emphasis on vertical approach in resolution, so as to set section 53 as a benchmark.
(iii) The proposition may work for operational creditors only in such cases where the resolution value is so high so as to cover the dues of all higher ranking creditors above operational creditors – which is a rarity.
(iv) The “fair and equitable” clause as inserted in the explanation seemingly intended to create a deeming provision, lacks clarity. The explanation may have 2 alternative interpretations – (a) that the distribution made in accordance with the amended clause shall be deemed to be fair and equitable, and (ii) the adjudicating authority shall have sufficient scope to look into the plan whether it is fair and equitable. In our understanding, the first interpretation seems to be the intent of the law-makers, given the undertone of the amendments.
(v) The amendment, rightfully, recognizes and upholds contractual rights of secured creditors in two aspects – (i) priority and (ii) value. A secured creditor is to be recognized and treated in accordance with the security it holds. Accordingly, the resolution plan should take into consideration differential (or inter-se) rights of secured creditors.
Notably, as regards priority, the report of Insolvency Law Committee was quite clear that sub-ordination agreements are to be respected in liquidation. The Insolvency Law Committee also clarified the misreading of section 53(2). Therefore, inter-se classification of secured creditors are to be respected even in insolvency. Insolvency is a stage prior to liquidation and there is no reason why the well-established principles shall not be followed in resolution.
Coming to value, assigning ‘liquidation value’ as well as ‘resolution value’ in cases where there are disparate security interests (including senior-junior charges), might be a complicated task. In such cases, liquidation value and resolution values are to be apportioned to categories of creditors first in accordance with section 53, and then in accordance with inter-se priority/exclusivity of contract, as the case may be.
6. Section 31 – Approved resolution plan to be binding on Governments/Government Authorities
According to section 31, a resolution plan approved by the adjudicating authority, shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
The amendment includes “the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” in the list of stakeholders bound by the plan.
Comments: The term “creditor” anyway included Government/Government authorities (which were creditors in the process). However, the amendment comes as a clarification for removal of doubts, as there were concerns regarding waiver of statutory dues under resolution plans. This is without prejudice to the provision of section 30 relating to operational creditors, as statutory dues fall within the ambit of operational debt.
7. Section 33 (2) – Liquidation before resolution
Section 33 (2) says where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors, approved by a majority of 66%, to liquidate the corporate debtor, the adjudicating authority shall pass liquidation order.
The amendment empowers the committee of creditors to approve liquidation of the corporate debtor anytime after its constitution. The approval for liquidation can be given even before preparation of information memorandum.
Comments: The judiciary has been emphasizing on resolution and in some cases ruled that committee of creditors cannot opt for liquidating the entity without even trying for resolution. The amendment makes it clear that the ultimate decision lies with creditors – whether to keep the entity alive or to liquidate it, and the creditors can decide so at any point of time.
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