After Round three of Amendments, Is it finally done for the Insolvency and Bankruptcy Code?
By Siddhant Dubey
Student, Institute of Law, Nirma University
In India, whenever there is a talk about debt default recovery, its laws or any other rulings has not been at par with global standards. All the actions taken by the creditors for the recovery of their money either by contract act or any sort of special laws, have not given adequate outcomes. Thus it was a dire need in Indian credit market, a consolidated law which fits globally and provide outcomes locally. Now, Before the advent of this code in 2016 there were certain other acts or rulings which were meant to dealt with situation of corporate debtors and creditors. Some of those are SARFAESI (Securitization and reconstruction of financial assets and enforcement of security interest), RDDBFI (Recovery of debt due to banks and financial institutions) for debt recovery by banks and financial institutions), Companies act, Presidency tows insolvency act, Provincial insolvency.
But as discussed above these were not so efficient with the results and it was necessary for the government to come up with a more consolidated form of code i.e. insolvency and bankruptcy code 2016.
Worries about the Insolvency and Bankruptcy Code
Since the formulation of the IBC there have been both the praises and critics of this document. Referring to the opinion made by supreme court judge justice Ramana that earlier governments have been biased toward the industrialist who took money but this after the enactment of the IBC code the culture in the country has some what changed and the relation between the lenders and borrowers have grown.1 It can be clearly said that after this bill India is now standing at par with global economies in terms of debt recovery.
However, as the society and the market of the creditors and debtors changed there came a need to alter the code as well, which led to a total of three amendments in 4 years. Here are some of the most prominent issues with the code of 2016.
- The code of 2016 was really uncertain about the issues dealing with corporate misdemeanors during the time of the previous management and this uncertainty made many contenders in the market unassertive because of the issue that there may be diversion or siphoning of funds cropping up later and putting the current bosses in worry.
- The code was lacking in a committee of creditors composing of all the financial creditors and that to without a cap on number. Several companies have funding partners with their certain return of thousands. Smooth functioning of the meetings is directly affected by the number of financial creditors in the committee. In certain jurisdiction, the government provides for similar committees for similar kind or class of creditors. A law of same kind was required in this code.
- This code requires that any decision taken by the creditors of the CoC should be by the 75% vote share of members. Any creditor holding the veto of 1% vote share can very easily nullify the votes of the rest of 74% of the creditors. In certain jurisdiction, decisions are made by either 75% vote share or 60% in number. Same is required by this code for better functioning.
- It is really hard to raise interim finance due to dubiousness in the provisions of RBI and also because of the formatting of the regulation 27 of liquidation process.2 Since regulation 27 has curbed interest payment after the passing of the order of liquidation, upcoming lenders are somewhat averse to join in.
- The not so broad definition and vague language of insolvency resolution process cost limits proceeds in case of services and same sort of payment to be dealt as RP cost, hence, limiting refund on priority in any defaulting event.
- After the sanctioning of the plans there is not much of clarity on what’s next which in the minds of potential investors creates doubt.
- CROSS – BORDER INSOLVENCY LAW: It is the concept referring to the situation where the debtor’s assets is in different countries or creditors are in different countries. This code requires similar kind of ruling to stand globally in terms of bankruptcy and insolvency laws.
- In this code there are not enough preventive measures for protecting the rights of the company prior to the handling of the management to the resolution professional.
- The code was pretty unclear about the processes of merger, demergers or amalgamations as these could be included in the resolution or not.
In the process of lawmaking, especially in India, there has been a lot of difference between the law laid down in papers and law actually in effect on ground. Thus neither any committee nor draftsmen can be held liable for this deficiency in laws and its regulation. Many of these issues can be fixed by just amending the laws but some requires a total change in the structure itself. These all should be done with no holding back. Because of these setbacks there is failure or delay in solving big cases which affects the long run of the insolvency and bankruptcy code.
How does it affect the ease of doing business in India?
With clearer set of laws and regulation it is really easy for the market players to invest and understand the way out of it. On the contrary, if the laws are not so competent or diverse then there would be fear in the minds of investors. So, it is really necessary to create a healthy debtor – creditor relationship and a facilitating environment to make the market players fearless in investing their money or services. Also, another reason for this is the meeting of international standards to compete globally.
Now, with all the flaws discussed above it was necessary to take action with no delay so as to make India stand globally in terms of relationship between lenders and borrowers. With same objective the government came with the insolvency and bankruptcy code amendment bill 2018.
The Insolvency and Bankruptcy Amendment Bill 2018
Bringing this bill into the Lok Sabha, then finance minister(interim) Piyush Goyal said that the government wants to look into the issues raised by the MSME. He added that the government has learned from the implementation the bill since 2016 and now want to sharpen it with the amendments.3 It was also added by the minister that the main purpose of the bill was not the liquidation of the company but to make sure that the employees there are still employed.
Pointers of the bill:
- The voting bracket for all the regular decisions of the committee of creditors has now been lowered from 75% to merely 51%. Also for much important decisions this bracket can be reduced to 66%.
- This bill clearly states that anyone who is allotted under any sort of real estate project will be considered as a financial creditor.
- According to the new amendment certain person are now not allowed to submit a resolution plan because the basic criteria has been altered.
- the amendment bill stated that the current eligibility norms for determining resolution applicants concerning non – profit assets and guarantors will now be of no relevance to all those who applies for resolution of ministry of micro, small and medium enterprise.
- It also specifies that homebuyers will also get a deciding position in the committee of creditors so that they can be part taking calls on resolution plans.4
- The application for insolvency resolution will be withdrawn if a total of 90% of the creditors agree to it.
- The ordinance states that there must be at least a special resolution passed by the three fourth of the people those are in control of the situation concerning corporate debtor before the corporate debtor initiates the corporate insolvency resolution.
The amendment bill of 2018 brought fair amount of improvements in the process of insolvency and further strengthening the relation between creditors and debtors.
The Insolvency and Bankruptcy Amendment Bill 2019
This ordinance seeks to mark the critical gaps and dissonance pertaining to insolvency resolution timelines, sums advanced to operational creditor according to resolution plan and also the voting criteria for any authorized personnel appointed by the financial creditors.
Pointers of the bill:
- This ordinance clearly states that an insolvency action concerning the real estate business can only be put into motion if 10% or 100 homebuyers (the lesser) or debenture holding market confirm to move.
- Some new threshold brought in for financial creditors who are hired by an authority to represented them. This was done primarily to lash out the chances of frivolous setting off of corporate insolvency resolution process (CIRP).
- In this amendment it is also kept in mind that in the process of insolvency the primacy basis of the corporate debtor remains intact. The business can run as an ongoing issue by making it clear that the permit, clearance, licenses, concessions etc. can in no condition be not renewed or suspended during the period of moratorium.5
- It is said in here that this process of corporate insolvency among the companies and the individuals must be completed in certain time frame.
- According to the code, if an application is filed before the national company law tribunal by any financial creditor for the purpose of initiating the insolvency resolution process then it is the duty of the NCLT to find the default in existence within a period of 14 days.
- As said in the ordinance, a resolution professional will be appointed by the committee of creditors. This professional will then come up with a resolution plan which needs the consent of the CoC to be moved forward. There are a total of 180 days to complete this process and this period may be extended for further 90 days.
- In case of rejection of the resolution plan by the committee of creditors, the process of liquidation will start against the corporate debtor. This ordinance defines an order of preference in the matter of liquidation which puts financial creditor over the operational creditor.
- Time limit for resolution process: According to the bill there are the total of 330 days to complete the resolution process. This period of 330 days is inclusive of all extension and any extra days taken to wrap up the legal proceedings regarding this process. It is also said that if any matter is pending for more than 330 days after this bill in action, it should be resolved in not more than 90 days.
- It is very much clear in this amendment that a resolution plan can talk about provisions on reorganizing through the methods of merger, amalgamations and demerger.
- The period of 14 days within which the NCLT have to find the existing default is directory not mandatory. This was concurred by the supreme court in the case of M/S. Surendra Trading Company Vs. M/S. Juggilal Kamlapat Jute Mills Company Limited and Others.
- Liquidation by CoC: as per this amendment the decision of the liquidation of the corporate debtor can be taken by the committee of creditors in between the constitution of the CoC and the confirmation of the resolution plan. This includes the time prior to preparing the information memorandum.
- Ordinance clarifies about the difference between unsecured financial and operational creditors and secured financial for that they should be treated equally. This needs to be done to ensure that the resolution is processed in zero biasness.
This ordinance was brought with the sole purpose of helping and aiding the financially distressed sectors. However, from this amendment real estate might enjoy but homebuyers have expressed deep disappointment. Since the inception of this code in 2016 it’s been three rounds of changes and this time it mainly focusses on the revival of corporate debtor. These changes are necessary with the changes in time and changes in the market environment to ensure that the object of the 2016 code is not diluted.
The Insolvency and Bankruptcy Amendment Bill 2020
In a debate while presenting the bill, the finance minister said that this amendment bill is at par with time and also the bill is in line with the supreme court order in “letter and spirit”. The new section 32A is the most remarkable addition of this amendment. These amendments are some serious efforts to face the ongoing issue of stressed assets. There were questions by the several MPs as to why this newly formed law needs to be amended this frequently to which the minister answered that it is because of “changing requirement” and “requirement of fine tuning”.
Pointers of the bill:
- This code determined a minimum limit for a sect of financial creditors can file an application for the initiation of insolvency resolution process. This limit has been set at 1 lakh rupees i.e. the defaulted amount must be 1 lakh rupees for in insolvency resolution to initiate.
- It is further clarified in this bill that any corporate debtor should not be denied to file an application for initiating corporate insolvency resolution against any other corporate debtor.
- The code also states that a permit, quota, registration, license, concession or any grant of this type or right shall not be called off during the moratorium period. This would be applicable only till the time debtor does not pay the ongoing dues which are because of either the use or the continuation of these permits or licenses.
Smooth functioning of the resolution processes for insolvency was the primary purpose behind the validation of insolvency and bankruptcy code of 2016. Delay in the resolution process has been one of the major problems of this code. India takes around 4.3 years to complete the process which is way higher that other countries. USA – 1.5 year, South Africa – 2, Brazil – 4 years, UK – 1 year. This very clearly depicts the not so good bankruptcy framework of India. Another issue that needs to be looked upon is the number of liquidation cases in the process. The core objective of the IBC is to resolve bankruptcy and liquidation is of no help in meeting that objective. Another vital objective of this code is giving supremacy to financial creditors, this needs to be done for the clearance of the blockage of credit channel in the country’s economy.
Some of these amendments can have adverse effects too, but as the time changes and the functioning of the market players changes it is really important for the government to change its laws accordingly to stand at par with the market and function globally with ease.
-By Siddhant Dubey
- Devarishi mankad, SC judge ramana praises bankruptcy law; says “previous government was favorable to defaulters, REPUBLIC TV (mar.06, 2020, 20:41) https://www.republicworld.com/india-news/economy/sc-judge-nv-ramana-praises-bankruptcy-law-says-previous-govt-was-favo.html
- Sumant batra, trouble with insolvency and bankruptcy code? What could really disturb its journey, FINANCIAL EXPRESS (oct.05, 2017, 4:51AM) https://www.financialexpress.com/opinion/trouble-with-insolvency-and-bankruptcy-code-what-could-really-disturb-its-journey/882930/
- Et bureau, Lok Sabha passes insolvency amendment bill, THE ECONOMIC TIMES (aug.01, 2018, 7:33AM) https://economictimes.indiatimes.com/news/politics-and-nation/lok-sabha-passes-insolvency-code-amendment-bill/articleshow/65217377.cms
- Trilegal, the insolvency and bankruptcy code (amendment) ordinance, 2018: key highlights, MONDAQ (July 03, 2018)https://www.mondaq.com/india/InsolvencyBankruptcyRe-structuring/714484/The-Insolvency-And-Bankruptcy-Code-Amendment-Ordinance-2018-Key-Highlights
- Vandana ramnani, IBC amendment bill 2019: developers happy but homebuyers say things more difficult now for them, MONEY CONTROL (dec.11, 2019, 10:36) https://www.moneycontrol.com/news/business/real-estate/ibc-amendment-2019-developers-happy-but-homebuyers-say-things-more-difficult-now-for-them-4721321.html
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