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2 July, 2018
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) has been assented by the President of India and brought into effect on 06 June 2018. The Ordinance is primarily based on the recommendations submitted by the Insolvency Law Committee (“ILC”) in its report dated 26 March 2018 (“ILC Report”). The ILC was constituted to address various gaps in the Insolvency and Bankruptcy Code, 2016 (“Code”) and to make the Code operate in a more efficient manner.
Following are the key amendments introduced through the Ordinance:
Reduction in Voting thresholdof the ommittee of Creditors ("CoC"):
The Ordinance has reduced the voting threshold from 75% (seventy five per cent) to 66% (sixty six per cent) for undertaking all major decisions (for instance, replacing the resolution professional, to approve the resolution plan, to initiate liquidation, extension of corporate insolvency resolution process (“CIRP”) etc.) under the Code and for undertaking routine decisions, it has reduced the said threshold to 51%(fifty one per cent).
Status of Homebuyers:
The Ordinance has amended various provisions of the Code to include 'home buyers' under the ambit of the term 'financial creditor'. The recognition would give home buyers due representation in the CoC, and would also enable them to initiate CIRP under Section 7 of the Code.
Relief to the Micro, Small and Medium Enterprises ("MSME") Sector":
The Ordinance grants certain exemptions to MSME with respect to eligibility criteria for a resolution applicant i.e. (i) The Ordinance allows promoters of MSMEs and persons in the management or control of such MSME's whose accounts at the time of submitting the resolution plan for the past 1 (one) year are classified as non-performing assets (“NPA”) to submit its resolution plan; (ii) The Ordinance also allows persons who have executed a guarantee in favour of a creditor of an operational debtor against which an application for insolvency resolution is made to submit a resolution plan for MSME. However, if the promoter is a 'willful defaulter' or attracts any other disqualifications, he shall not be eligible to submit a resolution plan; and ( iii ) The Ordinanceal so empowers the Central Government to grant further exemptions / modifications vide notifications, in the interestof public.
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Possibility of settlement, post-admission:
The Ordinance has permitted for withdrawal of an application after its admission, provided it is approved by the CoC with at least 90% (ninety per cent) of the voting shares.
Status of Guarantors during moratorium:
The Ordinance has clarified that, on commencement of the CIRP, moratorium shall not be made applicable to a surety in a contract of guarantee to a corporate debtor.
Clarifications with respect to enforcement of the resolution plan:
As per the Ordinance, the resolution applicant (whose resolution plan has been approved by the Adjudicating Authority) shall be provided a period of 1 (one) year from the date of approval, for obtaining all the requisite approvals (including statutory approvals). This would ensure that the said plan is efficaciously implemented. However, the Ordinance is silent about the process to be followed or the outcome if such statutory approvals are not obtained within a period of 1(one)year.
Deemed consent from the shareholders of the corporate debtor
The Ordinance has clarified that, the approval from the shareholders of the corporate debtor, as required under the Companies Act 2013 (or any other law) for implementing various actions stipulated under the resolution plan, shall be deemed to be given.
Status of pending winding up proceedings
As per the Ordinance, liquidation proceedings which are currently pending before the appropriate judicial authorities can now be transferred to the respective Adjudicating Authority which shall be dealt as an application for initiation of CIRP under the Code.
In addition to the above, the terms 'corporate guarantor' and 'relative' have now been newly defined; a new definition of 'related party', in relation to an individual has been introduced ; the word 'repayment' has been substituted with the word 'payment' with respect to various provisions relating to operational creditor, in order to widen the ambit of the said provisions; requirement of passing a special resolution by the shareholders of the corporate debtor, before filing an application for initiating CIRP against itself; the requirement of a financial certificate for an operational creditor
h.as been made optional, etc
Conclusion
The several amendments made to the Code should enhance the achievement of the main objects of the Code and also resolve several gaps that existed in the Code.
For instance, by decreasing the voting threshold and by allowing promoters of MSME's undergoing insolvency resolution process (who are not willful defaulters or are not disqualified with acts related to defaults) to bid in its entity, the Code may witness more successful resolutions of stressed assets.
The various challenges being faced under the Code such as applicability of limitation act, status of guarantors during the moratorium period, status of pending winding up petitions, eligibility criteria of resolution applicant have now been addressed by the Ordinance and should have a positive impact on the rescue of a defaulting company. The status of homebuyers as financial creditors may further burden the insolvency courts, however, it may act as a deterrent to companies failing to deliver promised homesontime.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
