Practice makes a man perfect and the same practice (read: implementation) makes a law seamless. Insolvency and Bankruptcy Code, 2016 along with its allied rules and regulation is just a year old technically (and around 5 months old effectively) and surely there are gaps which are being detected during implementation. Read more →

Author: Vallari Dubey

The Government on 24^th May 2017 released the Insolvency and Bankruptcy Code (Removal of Difficulties) Order, 2017 making additions in the Eighth Schedule of the Code, which originally amends the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA), in order to clarify the matter in view of the repeal of the Sick Industrial Companies (Special Provisions) Act, 1985, substitution of clause (b) of section 4 of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 and omission of sections 253 to 269 of the Companies Act, 2013. We discuss in detail the order brought and its effect.

Provisions before the Order

The Insolvency and Bankruptcy Code, 2016 (“Code”) came into effect from 28^th May 2016 amending the relevant provisions of several existing laws in India in order to modify them in line with the new Code. All such modifications were made in form of different schedules forming part of the Code. One such important amendment is that to the provisions of SICA. Whereby, Section 252 allowed the amendment to SICA to smoothly transfer the proceedings as provided in the Eight Schedule from the purview of SICA to the Code. Accordingly, following has been provided in the Eight Schedule:

“In section 4, for sub-clause (b), the following sub-clause shall be substituted, namely—

 ” (b) On such date as may be notified by the Central Government in this behalf, any appeal preferred to the Appellate Authority or any reference made or inquiry pending to or before the Board or any proceeding of whatever nature pending before the Appellate Authority or the Board under the Sick Industrial Companies (Special Provisions) Act,1985 (1 of 1986) shall stand abated:

 Provided that a company in respect of which such appeal or reference or inquiry stands abated under this clause may make reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 within one hundred and eighty days fromthe commencement of the Insolvency and Bankruptcy Code, 2016 in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016: Provided further that no fees shall be payable for making such reference under Insolvency and Bankruptcy Code, 2016 by a company whose appeal or reference or inquiry stands abated under this clause.””

 Additions made by virtue of the Order

The Order has added two more provisos in addition to the existing ones:

“Provided also that any scheme sanctioned under sub-section (4) or any scheme under implementation under sub-section (12) of section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall be deemed to be an approved resolution plan under sub-section (1) of section 31 of the Insolvency and Bankruptcy Code, 2016 and the same shall be dealt with, in accordance with the provisions of Part II of the said Code: 

 Provided also that in case, the statutory period within which an appeal was allowed under the Sick Industrial Companies (Special Provisions) Act, 1985 against an order of the Board had not expired as on the date of notification of this Act, an appeal against any such deemed approved resolution plan may be preferred by any person before National Company Law Appellate Tribunal within ninety days from the date of publication of this order.”

Impact and Analysis

The first proviso that has been added provides for treatment of a scheme sanctioned under Section 18(4) of SICA and for the purpose of monitoring the implementation of that sanctioned scheme under Section 18(2) of SICA. With the immediate effect of this Order, following shall be effective:

1. All the sanctioned schemes shall be deemed to be an approved resolution plan under Section 31(1) of the Code.
2. And for the purpose of monitoring and implementation the same shall be dealt with the provisions of the Code set out to deal with approved resolution plans.

The second proviso provides for changes with respect to appeal. Accordingly, the statutory period within which an appeal was allowed under the Sick Industrial Companies (Special Provisions) Act, 1985 against an order of the Board had not expired as on the date of notification of this Act, an appeal against any such deemed approved resolution plan may be preferred by any person before NCLAT within 90 days from the date of publication of this order.

To understand this arrangement, one shall go back to the provisions of time-limit set out in SICA 1985, relevant extract of which is:

25. Appeal: – (1) Any person aggrieved by an order of the Board made under this Act may, within forty-five days from the date on which a copy of the order is issued to him, prefer an appeal to the Appellate Authority:

Provided that the Appellate Authority may entertain any appeal after the said period of forty–five days but not after sixty days from the date aforesaid if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal in time.

 Moreover, the validity of the appeal in the Order is in relation to the date of notification of SICA 2003, which is 25^th November 2016.

 The above arrangement is explained in the below mentioned table:

Days to Appeal under SICA 1985 till 1st January	Appeal under SICA 1985	Appeal under the Code to NCLAT	Time-limit to file appeal with NLAT
Within 45 days	Valid	Valid	Within 90 days of 24th May 2017
Withing 105 days	Valid with sufficient cause	Valid	Within 90 days of 24th May 2017
Beyond 105 days	Not valid	Not valid	N/A

Looking at the intention, it is understandable that a window of 90 days without any further extension has been provided to keep the intention of justice in mind and in the statutory stream, while everything is being transferred to the newly established Insolvency and Bankruptcy Code, 2016.

 

The speed with which the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) was enacted; the Financial Resolution and Deposit Insurance (FRDI) Bill, 2016 (hereinafter referred to as “FRDI Bill”) will soon see the light of day1 . Both the Code and FRDI Bill is expected to provide a comprehensive resolution mechanism for our economy. In our earlier write-up titled “Financial Resolution and Deposit Insurance Bill: Implications for NBFCs2 ”, we in detailed discussed the implication of FRDI Bill on NBFCs.

Objectives of the Code and FRDI Bill

The Code was drafted by the BLRC3 with an objective to resolve insolvency and bankruptcy on the following grounds:

 Low time to resolution;

 Low loss in recovery;

 Higher levels of debt financing across a wide variety of debt instruments.

The objective with which the Code is enacted is restricted to corporate person and its creditors; however, the objective of FRDI Bill is to provide a holistic remedy for economy. FRDIC provides to pursue following objectives:

 Contributing to the stability and resilience of the financial system;

 Protecting consumers up to a reasonable limit; and

 Protecting public funds, to the extent possible.

Applicability of FRDI Bill

The Code applies to corporate persons (as defined under section 3 (7) of the Code) which does not include financial service provider (as defined under section 3 (17) of the Code). Consequently, financial service providers registered with financial sector regulators do not get covered under the Code. Does this mean that a financial service provider cannot file a case under the Code? The answer is clearly no. Financial service provider can file an application under the Code against the defaulting entity; however, at present there does not exist any comprehensive statute under which an application can be filed if there is a default made by a financial service provider. FRDI Bill intends to provide a specialised resolution mechanism to deal with a bankruptcy situation in banks, insurance companies and financial sector entities.

Intent of FRDI Bill

Lots of questions may arise on the intent of the FRDI Bill. Whether FRDI Bill intends to cover a financial service provider, such as an NBFC whose failure will be insignificant for the economy or too-big-to-fail (TBTF) entities whose failure will not only be significant but will also be dangerous for the economy.

It is pertinent to note that section 227 of the Code empowers the Central Government to notify the financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings to be conducted under the Code. Therefore, the intent of the law seems to exclude the insignificant financial service providers from the purview of the FRDI Bill.

Conclusion

It will be a debacle if small NBFCs and MFIs were to be treated at par with TBTF entities for which the bill is drawn. If potential issues with IDBI are taken at par with a failure to honor its commitments by one of 12000 odd NBFCs in the country, it would defocus the regulators from the issues relating to larger entities.

1 http://www.livemint.com/Politics/gNjoEMQH8Kx8CvI0QyW6YO/Govt-to-table-bankruptcy-law-forNBFCs-MFIs-in-monsoon-sess.html

2 http://india-financing.com/financial-resolution-and-deposit-insurance-bill-implications-for-nbfcs-byniddhi-parmar/

3 Bankruptcy Law Reforms Committee

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By Niddhi Parmar :- parmar@vinodkothari.com