bankruptcy code
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This article has been written by Lakshmi. V. Pillai of 5th year pursuing B.A. LL.B from GLS Law College, Ahmedabad. This article is about the proposed amendment bill of IBC, 2016.

Introduction

On December 12, 2019, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, was introduced by the Finance Minister Ms. Nirmala Sitharaman at the Lok Sabha. The bill was proposed to make amendments to the Insolvency and Bankruptcy Code, 2016. As per the requirements from time to time, there were changes made in the IBC. The IBC is a new field of work for many fresh law graduates and lawyers and also for those who are already dealing with bankruptcy law. With every new amendment, the lawyers have to make a shift and work accordingly. The lawyers and other professionals like CA and CS need to be flexible. New responsibilities, new roles, and new compliances come in with every new amendment. Every amendment crucially affects the practice of related professionals. Seeing IBC, from a lawyer’s perspective is quite interesting. Let’s see what are the new things which will come up with the new proposed amendment of the IBC.

About IBC and its Objective

The IBC is a consolidated bankruptcy law in India that seeks to provide legal solutions to companies and individuals when they are subjected to bankruptcy and insolvency. The main objective of the Code is to revive the company from bankruptcy and the amendments are made accordingly.  

Reasons behind the amendment

The reasons behind the proposed amendment are as follows:

  1. The laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals shall be consolidated and amended so that the procedure shall be completed within the time period as provided in the Code and maximization of value of assets shall be attainable for the stakeholders.
  2. To promote entrepreneurship.
  3. To balance the interests of all the stakeholders and avail credit including alteration in the order of priority of payment of Government dues.  
  4. While the company goes through the Corporate Insolvency Resolution Process (‘CIRP’) or liquidation, the highest priority shall be given to the last mile funding to the Corporate Debtors (‘CD’).
  5. The Code comes up with steps to prevent potential abuse by certain classes of financial creditors.
  6. Subject to fulfillment of certain conditions, immunity shall be provided against the corporate debtor, property of the CD and the successful resolution applicant subject to fulfillment of certain conditions.
  7. To fill the critical gaps in the corporate insolvency framework.

Major changes and impact on a lawyer’s practice

In crisp

(i) The amendment is proposed under Section 5(12) which shall be deemed to be omitted, so as to provide clarification regarding the insolvency commencement date during the admission of an application under CIRP.

(ii) The amendment is proposed under Section 7 by inserting certain provisos specifying a minimum threshold for certain classes of financial creditors for initiating the insolvency resolution process.

(iii) The amendment is proposed under Section 11 of the Code, so as to clarify that a CD shall not be prevented from filing an application for initiation of corporate insolvency resolution process against other CD.

(iv) The amendment is proposed under Section 14 of the Code which is made to clarify that during the Moratorium period a license, permit, registration, quota, concession, clearances or a similar grant or right cannot be terminated or suspended.

(v) The amendment is proposed under Section 16 of the Code regarding the appointment of the IRP shall be the date of admission of the application for initiation of insolvency resolution process of the Corporate Debtor.

(vi) The amendment is proposed under Section 23 of the Code which enables the “resolution professional”  to manage the affairs of the corporate debtor during the interim period between the expiry of CIRP till the appointment of a liquidator.

(vii) To insert a new Section 32A so as to provide that the liability of a corporate debtor for an offense committed prior to the commencement of the corporate insolvency resolution process shall cease under certain circumstances;

(viii) The amendment is proposed under Section 277 of the Code so as to clarify that the insolvency and liquidation proceedings for financial service providers may be conducted with such modifications and in such manner as may be prescribed;       

(ix) The other amendments are consequential in nature.

Debenture holders, flat-owners and other classes now require a 10% majority (mere INR 1 lakh unpaid dues, not enough) Section 7

Before the proposed amendment 

With the recognition of householders as a new class of Financial Creditors (FC) under the IBC, there were a number of cases that have been filed in the NCLT. But along with this new change, frivolous cases started piling up. And the same has been observed by the Appellate Authority and Adjudicating Authorities. So to mitigate the risk, the new proposed amendment will bring some threshold to maintain the applicability of the IBC to retail financial creditors.

After effects

As per the new amendment, there are certain conditions that retail creditors need to consider. They are as follows:

(i) The application for the initiation of the CIRP shall be filed jointly by at least:

  1. 100 of such creditors who belongs to the same class; or
  2. 10 % of the total number of creditors who shall belong to the same class.

Whichever is less, the application can be made on that basis.

(ii) If the application is filed by the real-estate project allottees, then they have to file jointly and need to comply with any of the points provided below:

  1. Such allottees in number of 100 of the same project; or
  2. 10% of the total number of allottees from the same real estate project.

Whichever is less, the application can be made on that basis. 

Further, the effect of the amendment is prospective in nature.

New legal work for lawyers/ CAs/ CS

The work for all the professionals will be doubled. They won’t only be helping in litigation, but now they also have to work as a mediator and constitute a committee of such individual members before filing an application under this section.

Change in timelines of CIRP process 5(12) and 16(1)

Before

As per the earlier proviso, the IRP was not deemed to be appointed by the admitting order of the NCLT under Section 7, 9 or 10. The appointment date was considered as the date on which the IRP is appointed by the AA. Section 16 (1) which is regarding the appointment of IRP is related to Section 5 (12), as per this section the appointment of IRP shall be made within 14 days of the insolvency commencement date.

What will happen?

As per the proposed amendment, Section 5 (12) stands removed. And the change in the previous section resulted in the change in Section 16(1) of the IBC, IRP shall be deemed appointed on the insolvency commencement date itself.

New legal work for lawyers/ CAs/ CS

This will essentially put on responsibilities on the shoulders of the CA, CS, and lawyers. They need to be properly updated with the orders of the NCLT and regulations of the IBBI so that they do not miss out on the dates. The proposed change will make the stakeholders to strictly follow the timelines and prepare before the application is filed in the NCLT, with all needed documents. As the countdown starts from the date of the admission of the insolvency procedure, they have to be prepared for public advertisement and formation of COC within time.

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The right of CD to initiate CIRP process

Before

Earlier there was ambiguity regarding the right of the Corporate Debtor to invoke CIRP against another corporate debtor. But with the proposed amendment this seems to be resolved.

What will happen?

After the amendment, the Corporate Debtor will have the right to file the case against another CD even while the CIRP of the CD is continuing in the NCLT. The amendment is proposed as in some earlier cases the AA rejected the claim of the CD to initiate the CIRP process against another CD. One of the major changes we will see is when one CD is enrolled in the case, the other Corporates which are in default will be caught and they will also come under the purview of the proceeding. This will result in the emergence of a chain of cases.

New legal work for lawyers/ CAs/ CS

Of course, this proposed amendment will open new doors to the lawyers/CAs/CS because new varieties of cases will be evolved after this amendment.

The CD will continue to work as a going concern

Before

Before the amendment, there were no provisions related to non-suspension, termination of the license or registration, as the CD goes through the CIRP process and enters Moratorium. However,  the paramount objective of the IBC is the going concern of the CD, the proposed amendment avails the same. 

What will happen?

The amendment in the Section 14 (1) which describes about the moratorium period of the CD, gets a clarification which allows the CD to be considered as a going concern company by the RP with the condition that there is no default in payment of current dues arising because of the due or continuation of the license, permit, registration or such similar grants during moratorium. 

The following grants or rights are made available to the CD during moratorium:

  • License;
  • Registration;
  • Permit;
  • Quota;
  • Concession;
  • Clearances;
  • Or similar rights or grants.

These grants or rights shall not be suspended or terminated on the grounds of insolvency.

The rights or grants provided by the following authorities shall be deemed to be unsuspended:

  • Central Government;
  • State Government;
  • Local Authority;
  • Sectoral Regulator;
  • Any other constituted authority is constituted time being in force.

The flexibility so provided, ensures adherence to the guiding objectives of the Code, as well as maintains fairness by imposing pre-conditions for enjoying the benefit of this clarification.

Further, the definition of ‘Essential goods and services’ given under 14 (2A)  states that IRP or RP can take such steps which is critical to protect and preserve the operations of such a CD. However, if the CD does not pay dues on time during moratorium for such services, then the other party can terminate the service and supply.

Another change will be in the Section 14(3)(a) – ‘Inapplicability of moratorium’, in which the amendment in Section 14(1) will not be applicable to such transactions, agreements or other arrangements if the Central Government with consultation of any financial sector regulator or any other authority notifies anything regarding moratorium.     

New legal work for lawyers/ CAs/ CS

To comply with the proposed changes, the network of lawyers, CAs and CS are needed so that all the compliances can be done properly and the RP can be updated properly regarding the particular matter. Running a company as a going concern needs a lot of work to be done in the background and the RP would not be able to do the entire work as required. One important thing which is undetermined in the proposed amendment is the discretion given to the RP to analyze what comes under the critical requirements in regards to goods or services essential for the company to run as a going concern. This discretion may lead to uncertainty later. It will become the duty of lawyers/CS/CA to check the notifications regarding this regularly. 

“Related party” Financial Creditor

Before

Earlier the financial creditor who was not considered to be a ‘related party’ was limited to two transactions which prior to the insolvency commencement date:

  1. on account of conversion or substitution of debt into equity shares; or
  2. instruments convertible into equity shares.     

These were the conditions provided in Section 21 (2) ‘Committee of Creditors’ and Section 29A Ineligibility to submit resolution plan’ Second proviso to Explanation I Clause (c) and Clause (j).      

In Section 21 (2) as per the second proviso of the IBC, the first proviso shall not apply to a FC, regulated by the financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.

Section 29A deals with ineligibility to submit a resolution plan. Further, in Clause (c) and Clause (j), the Second proviso to Explanation I inclusion is being proposed in which FC’s will not be considered as  “related party”, on the basis mentioned above.

What will happen?

However, after the proposed amendment bill, the scope has been widened by adding one more condition to it i.e. completion of such transactions as may be prescribed, prior to the insolvency commencement date and this insertion will be included in all the above-mentioned sections.

New legal work for lawyers/ CAs/ CS

The work for lawyers is expected to increase as one more condition is evolved wherein a financial creditor shall not be considered as a related party of the CD. This facilitates the government the right to prescribe such transactions and on the completion of such transactions, FC will not be considered as a related party.

Office of RP

Before

Earlier as per Section 23 (1) of the IBC, the RP had the duty to continue the management of the CD after the resolution plan has been submitted in the court and until it passed an order. However, with the proposed amendment the duties of the RP will be extended.

What will happen?

After the proposed amendment  the RP has to continue his duty of managing  the operations of the CD:

  1. Until the resolution plan is approved by the court as per Section 31 (1).
  2. Until the appointment of a liquidator is passed under Section 34 by the AA.

New legal work for lawyers/ CAs/ CS

The work of the lawyers/CA/CS will be extended until the RP continuing to be in the same position.

Immunity over offenses (32A) 

Before

Earlier there were no sections relating to immunity of offenses under the Code, but in the proposed amendment new section is inserted for the same.

Under Section 29A the following persons are ineligible to be resolution applicant:

  • The persons who have contributed to the defaults of the corporate debtor; or
  • The persons who are undesirable due to incapacities as specified in the section; or
  • The persons who are a ‘related party’ to another defaulting party;
  • The persons who are prevented from gaining control of the corporate debtor by being declared ineligible to submit a resolution plan under the Code.

Section 29A was asserted to protect the creditors of the company by safeguarding them against unscrupulous persons who irrespective of their earlier defaults try to reward themselves by undermining the whole objective of the Code and do not aim to contribute to the revival of the corporate debtor. Earlier, the CD was not protected from the offenses which were done by him before the CIRP.

What will happen?

The proposed amendment is made so that immunity shall be provided to the new resolution applicant and the corporate debtor, from the punishment for offenses that have been done prior to the CIRP.

New legal work for lawyers/ CAs/ CS

The work of the stakeholders remains the same. They have to take care that no party in connection with offenses as per Section 29A will be availed immunity under Section 32A of IBC.

Power to make regulations and rules by CG and IBBI (239(2), 240(2))

Before

There are minor changes made in the proposed amendment which is explained below.

What will happen?

It can be divided into two parts:

Powers  to Central Government

A substitution is made under Section 227 in the ‘Power of CG to notify financial sector providers’. Earlier it was “Notwithstanding anything to the contrary examined in this Code or any other law for the time being in force, the CG may” which is proposed to be substituted as “Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the CG may,”. 

Under Section 239(2) which describes about the ‘Power to make rules’, three clauses are inserted namely Clause (fa), (fb) and (fc) as per the changes made under Section 21 (2), Section 29A Explanation I to Clause (c) and Clause (j) of Section 29A respectively.

Powers of IBBI

Section 240(2)deals with the power to make regulations. Further, Clause (ia) has been inserted, which gives power to the IBBI to make regulations in consonance with the amendment made in subsection (2A) of Section 14 of the Code.

New legal work for lawyers/CA/CS

These proposed changes will not directly impact lawyers/CA/CS.

Conclusion

The proposed changes will greatly impact the professionals related to it. The lacunae in proposed amendments will be seen in the upcoming time. However, the work for the lawyers/CA/CS will be in high demand.

References


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