This article is written by Abhishek Dubey, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “How will including Merger and Amalgamation under IBC resolution benefit the corporate debtor”.
A corporate person is a person who gives debt to any person. A corporate person as defined under Section 3(7) of Insolvency and Bankruptcy Code it includes:
- Companies under the Companies Act 2013.
- Limited Liability Person defined under the Limited Liability Partnership Act.
- Any other person incorporated with limited liability.
But the corporate person or debtor does not include financial services and Non-Banking Financial Institution.
IBC for the corporate debtor
According to Section 7 and 9 of the Insolvency and Bankruptcy Code, it is not compulsory for corporate debtors to be heard before filing the IBC application and according to Section 14 of IBC after admitting the application the management of the company goes in the hand of Interim Resolution Professional. Hence there is a high chance that small mistakes by the company may trigger the company to go out of hands.
Protection against fraudulent claims
A corporate debtor can defend against themselves if the complaint made by the creditor is fraudulent or not genuine. The right to file an insolvency petition is given to corporate debtors in case the complaint is not genuine.
Defence against the Insolvency petition
Under the Insolvency and Bankruptcy Code, it is important for the creditor to follow procedure before filing the petition and if the creditor has not followed the procedure then the debtor may take good defence to dispose of the petition.
Against the Financial creditor
If the petition is filed against the corporate debtor by a financial creditor the corporate debtor should check:
- Whether the key essentials to file the petition has been fulfilled or not by financial creditor.
- If there is debt and default is missing in petition then application filed by a financial creditor should be rejected.
- Whether the complaint filed by the debtor is genuine or not, the accounts should be verified and if there is something missing on that or if it has not been correctly mentioned then application filed by a financial creditor should be rejected.
Against the operational creditor
If the petition filed by an operational creditor, the corporate debtor should check the following things:
- Before filing the petition the operational creditor should give demand notice to the debtor in a prescribed manner.
- Any other case pending between debtor and creditor.
- And the existence of any dispute between creditor and debtor.
If any of the cases or disputes exist then the corporate debtor has a very strong point to file the petition.
Business does not always succeed, it may face many challenges and issues due to which there may be a delay in fulfilling responsibility towards the creditor. If the corporate debtor is unable to discharge its responsibilities towards creditor because of fewer funds and any other reason then, the corporate debtor can apply for corporate insolvency resolution process or he can file an insolvency petition.
Benefits of resolution 2019 in Insolvency and Bankruptcy Code for merger and amalgamation of corporate debtors
The Insolvency and Bankruptcy Code is effective from 1st December 2019. It is one of the most discussed legislation in India. The merits in law and relevance of law were first discussed in Swiss Ribbon Pvt Ltd and Anr vs Union of India. The amendment of 2019 IBC shows that law is changing with the change in a business environment.
Merger and Amalgamation
The company following the procedure of amalgamation and merger are never considered as healthy entities. In Section 5(26) it is defined that resolution includes restructuring of corporate debtors and such restructuring is done by way of merger, demerger and amalgamation etc.
Benefits to corporate debtors
A new resolution in IBC has brought various changes which are beneficial to corporate debtors. The key benefits are:
No Delay in the admission of petitions
In India, if anything is successful after some time there becomes a crowd. The new provision of Section 7(4) gives responsibility to NCLT that if it does not pass an order within 14 days of the application then they should record the reason. The intention of this amendment is to provide justice fast. This amendment is good for corporate debtors. There will be no delay in injustice after this amendment. One of the practical reasons for the delay in justice is a limited number of benches and members which is why there is so much pressure on existing benches and members.
Extension of time for resolution
Prior to the amendment, the resolution time process was for 180 days but now as per provision in Section 12(3), a maximum time limit in the corporate resolution process is for 330 days including the time taken in such resolution process in legal proceedings etc.
In case of an ongoing corporate insolvency resolution process which has been exceeded for 330 days such resolution shall be completed within 90 days from the date of commencement of the act. such a resolution process to be completed within 90 days from the date of commencement of the act. In case NCLT does not pass an order within such specified period of time then NCLT should order to liquidate the corporate debtor.
This amendment also gives the right to NCLT to extend the time if the resolution is not passed within the time.
Individual home buyers
Section 25(3A) states that the authorised representative will cast his vote in the committee of the creditor on behalf of the financial creditor he will represent on the basis of the majority of the votes. This amendment applies to the authorised representative appointed under Section 21(6(a). Earlier there was no voting authorised representative appointed by the instruction of any creditor from a committee of the creditor. This amendment will benefit stressed real estate companies.
Liquidation even before the resolution process
NCLT was hesitant to order the liquidation of the corporate debtor before preparing a memorandum of information. But Section 33(2) brought a new amendment that the committee of a creditor can choose to liquidate the corporate debtor even before the resolution process by giving an application to NCLT and this decision can also be taken before the preparation of Memorandum of Information.
Resolution Plan Binding on Governments
When a dispute arises between the financial and operational creditor, secured and unsecured creditors in the organisation, the government will definitely get affected because in that dispute there will be tax issues and government or tax authority will pressurise the organisation for payment of dues. This amendment brought in Section 31(1) that any order passed by the NCLT will be binding on the state government and central government and recovery of government dues will be in accordance with the order of NCLT.
Distribution plan to be considered by the Committee of Creditors
The NCLT in the case of Essar Ltd. has observed that decision is not within the consideration of the committee of creditor and tribunal can decide the distribution ratio. The amendment in Section 30(3) has been amended whereas, manner of distribution is also specifically brought within the purview of the committee of creditors to facilitate the decision-making process.
Fair and equitable distribution
Before the resolution, the treatment of operational and financial creditor was unequal and unfair, the operational creditor was not allowed to cast vote. The Supreme Court in case of Swiss Ribbon Pvt ltd. that distribution between creditor shall be fair and to treat secured as well as unsecured creditor equal. Section 30(2)(b) also amended that distribution between creditor should be fair, and it also covers all types of creditor operational, financial and another type of creditor.
Share of Pie
The national company law tribunal in the case of Essar Ltd. has decided the applicability of Section 53 in the resolution process that operational creditor was treated as first-class and they were given more priority than the financial creditor.
Section 3(2) amendment stated that operational creditor shall be given at least the liquidation value of their debt after the winding or liquidation of the company.
The NCLT in case of Sirpur Private Ltd. case that financial creditor should be given at least the liquidation value due to them this was amended on 25 July 2019.
The merger of the company is regulated by Section 230 to 233 of Companies Act 2013. The merger is initiated by the approval of a resolution passed by 75 per cent of shareholders. The creditor also has to agree for the merger of at least 75 per cent of the majority. When the corporate insolvency process is initiated under the Insolvency and Bankruptcy Code the insolvency professional is appointed who controls the assets of the company. The resolution proposal is brought in front of a resolution officer after the approval of creditors and shareholders. When companies or creditors file the application before NCLT the corporate debtor can not sell their assets before the expiry of 90 days that memorandum period.
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