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17 July, 2018
On June 6, 2018, the Government once again amended certain provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), by promulgating an ordinance[1] (the2018 Ordinance) which introduces sweeping changes to the both substantive as well as procedural aspects relating to the insolvency process. Some of the key changes are analysed below.
Homebuyers – A New Class of ‘Financial Creditors’
The 2018 Ordinance has amended the definition of ‘financial debt’ to include amounts raised from ‘allottees’ in respect of a real estate project (as defined under the Real Estate (Regulations and Development) Act, 2016 (RERA)). Accordingly, homebuyers will now be entitled to a seat on the ‘committee of creditors’ (CoC) of the corporate debtor. However, given the large number of homebuyers for a project, they will be treated as a class of creditors and be represented in the CoC by an ‘authorised representative’ to be appointed by the National Company Law Tribunal (NCLT).
It is worth noting that Section 18 of RERA affords allottees the right to:
- Demand a refund of the entire amount advanced by the allottee (along with interest at the prescribed rate); or
- Be paid interest (by the promoter/ developer) for every month of delay till possession is handed over.
In insolvency proceedings, it is likely that the allottees (even where they have not withdrawn from the project) may file their claims for the entire advance amountand accrued interest. In such cases, it will have to be considered if, on account of filing of such claims (i.e. for the advance paid), the allottees would be deemed to have withdrawn from the project and if their claim against the corporate debtor can be limited to monetary claims only (i.e. the advance amount and interest).
Section 29A – Applicability Widened and Eligibility Conditions Refined
Since its introduction on November 23, 2017[2], Section 29A of the IBC has had considerable impact on the course of resolution of corporate debtors under the IBC. The 2018 Ordinance has widened its applicability and provided limited exemptions to resolution applicants by tweaking the eligibility criteria.
Related parties (of individuals) – The definition of ‘related party’ in the context of an individual person has been introduced (which was earlier missing), providing clarity to the scope of connected persons (of a resolution applicant) who have to be tested for disqualifications set out in paragraphs (a) through (i) of Section 29A (the Disqualification Criteria). The definition[3] of an individual’s related party is extensive and will cast a wide net. In addition, where the individual (whose connected persons need to be determined) is married, the relative of the individual’s spouse will also be included within the scope of ‘connected persons’[4]. This, on the face of it is excessive and could have been handled better by limiting the definition of relatives as used in the Companies Act, 2013. The wider definition under the 2018 Ordinance will increase the burden on the resolution professional and the CoC (from the perspective of eligibility determination).
Exemptions relating to Section 29A(c) – One of the major concerns highlighted by market participants is that financial investors should not be barred from bidding for companies under the IBC on account of Section 29A. This was (and to a certain degree continues) to be the case, given the broad ambit of the Disqualification Criteria, the principal amongst them being Section 29A(c), which disqualifies a person who is the promoter or in control of a company whose account has been a non-performing account (NPA) (whether in India or abroad) for more than one year (the NPA Disqualification).
The 2018 Ordinance identifies certain ‘financial entities’ – though NBFCs are conspicuously absent from this list – which have been exempt from the NPA Disqualification provided that such financial entities are not related to the corporate debtor (in the manner as prescribed under the 2018 Ordinance). Also, it is worth noting that
(i) Such an exemption is available only where the resolution applicant is a ‘financial entity’ and not to connected persons of the resolution applicant (even where such connected person is a ‘financial entity’).
(ii) For an entity to qualify as a ‘financial entity’, it would also have to comply with additional criteria to be prescribed by the Government in consultation with the relevant financial sector regulator (in this case, the RBI and SEBI).
The 2018 Ordinance also exempts the NPA Disqualification for a resolution applicant that has acquired a company (whose account is an NPA) pursuant to a resolution plan approved by the NCLT under the IBC.
This exemption is available to the relevant resolution applicant for a period of three years following the approval of the plan.
Exemption for a category of ‘connected persons’ – Connected persons referred to in Explanation I(iii) (to Section 29A(j)) have now been exempt from the Disqualification Criteria set out in paragraphs (d)[5] and (e)[6] of Section 29A.
Exemption for ‘MSMEs’ – The 2018 Ordinance provides further relief to ‘micro’, ‘small’ and ‘medium’ enterprises[7] (MSMEs) by exempting them from the Disqualification Criteria under paragraphs (c) and (h) of Section 29A and also allows the Government to exempt the other Disqualification Criteria for MSMEs as well (or direct their applicability with modifications).
Amendments to Section 29A however will not apply to any resolution applicant that has submitted a resolution plan prior to June 6, 2018[8].
Moratorium Not to Apply to Guarantors
The 2018 Ordinance has clarified that the moratorium imposed by the NCLT under Section 14(1) (at the time of admission of an insolvency application) will not apply to guarantee contracts in relation to the corporate debtor’s debt.
Additionally, Section 61(3) of the IBC has been amended to ensure that the NCLT (which has jurisdiction over the insolvency resolution of the corporate debtor) will also have jurisdiction over the insolvency resolution of the corporate guarantor (irrespective of the jurisdiction (within India) where the corporate guarantor may have been incorporated in). This provision previously only covered personal guarantors.
Lowering of CoC Voting Thresholds
Previously, all decisions of the CoC needed to be approved by 75% of the voting share of the CoC members. This threshold has now been lowered to 51% except for the following requirements:
90% approval for withdrawal of an insolvency application post admission by the NCLT (dealt with in more detail below).
66% approval for resolutions: (i) approving extension of the corporate insolvency process beyond 180 days; (ii) relating to matters listed out under Section 28 of the IBC; (iii) approving a resolution plan; and (iv) replacing a resolution professional.
Post Admission Withdrawal
Following the Supreme Court’s decisions to permit withdrawal of insolvency proceedings post admission (by using its inherent powers under Section 142 of the Constitution of India) on a case specific basis, the 2018 Ordinance has introduced Section 12A permitting the NCLT to now allow insolvency proceedings to be withdrawn provided it has the consent of 90% of the voting share of the CoC members. Certain additional conditions (for withdrawal) have been prescribed under the regulations[9]:
The application to withdraw must be submitted: (i) by the same person who had filed the insolvency application to the resolution professional in the specified format prior to issuance of the invitation for expressions of interest(pursuant to Regulation 36A); and (ii) be accompanied by a bank guarantee for the specified amounts[10].
The application (as submitted to the resolution professional) must be approved by the CoC by the relevant majority (i.e. 90%) within seven days (of the constitution of the CoC or the application, whichever is earlier) and the resolution professional is required to submit the application to the NCLT within three days of such approval.
The condition (imposed under the regulations) that withdrawal is permitted only prior to issuance of the advertisement inviting expressions of interest considerably limits the applicability of this provision, which was not included in the 2018 Ordinance and is questionable.
Conclusion
The changes introduced by the 2018 Ordinance bring much needed clarity to the IBC and should hopefully be enacted into legislation soon, in the monsoon session of Parliament commencing July 18, 2018.
[1] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018
[2] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017
[3] As introduced in Section 5(24A) of the IBC
[4] See Section 5(24A)(a) of the IBC
[5] Ineligibility on account of conviction of an offence punishable with imprisonment of more than 2 years
[6] Ineligibility on account of being disqualified to act as a director under the Companies Act, 2013
[7] As defined under the Micro, Small and Medium Enterprises Development Act, 2006
[8] Third proviso to Section 30(4) of the IBC
[9] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 as amended on July 3, 2018
[10] Being resolution process costs incurred under Regulation 34 of the CIRP Regulations and such other costs as directly relating to the insolvency resolution process and as approved by the CoC
For further information, please contact:
L. Viswanathan, Partner, Cyril Amarchand Mangaldas
l.viswanathan@cyrilshroff.com
