Recent amendments made to the Insolvency and Bankruptcy Code 2016

Recent amendments made to the Insolvency and Bankruptcy Code 2016

To significantly boost the framework of insolvency resolution, the Union cabinet on 17th July has cleared major changes to the bankruptcy law and amended its provisions. There are 8 major amendments in Insolvency and Bankruptcy Code, 2016. In this memorandum I will delve into all 8 amendments and discuss its ramifications. I will also highlight the importance and need of incorporating the amendments and the issue with pre-amended code.

Briefly talking about Insolvency and Bankruptcy Code, it is enacted to improve the prevailing frameworks on insolvency and bankruptcy of individuals and corporates by offering uniform and comprehensive code[1].

The enactment of various legislation likes Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, are unable to given the desired result. Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have dwindled the confidence of moneylender. The other enactments like Presidential Towns insolvency Act, 1909 and the Provincial Insolvency Act. 1920 are now centuries old and are rarely used in contemporary cases and their existence is also little known. These antediluvian laws are the reason that India ranks 136 out of 189 countries as per index of World Bank index on ease of resolving insolvencies[2].

Talking about the latest amendment to Insolvency and Bankruptcy Code, the ministry of corporate affairs in its object has stated: –

The amendments aim to fill critical gaps in the corporate insolvency resolution framework as enshrined in the Code, while simultaneously maximizing value from the Corporate Insolvency Resolution Process (CIRP[3])

It further stated “The Government intends to ensure maximization of value of a corporate debtor as a going concern while simultaneously adhering to strict timelines[4]

Following are the recent amendments to IBC Code, 2016 : –

  1. The recent amendments sought to fasten the process of resolution and liquidation. The major amendment is that now instead of 270 days the resolution now needs to be completed within 330 days. The reason for prolonging the period is because in litigation lots of time is exhausted and resolution process cannot be completed within time period and courts through their discretion used to extend the time limit which makes the provision redundant. But now the time period of 330 days also includes litigation time within which the resolution process has to compulsorily completed. After the said period the company’s assets will have to go for liquidation. Amongst all this is the most important amendment.
  2. More power is given to Committee of Creditors (CoC) in terms of making decisions on the distribution of funds to various creditor categories. Under the code, financial creditors have a priority over operational creditors in case of distribution under a resolution plan. But, the Code was silent on distribution to creditors other than financial and operational creditor, the Committee of Creditors have now power to decide how claims will be distributed on the basis of commercial consideration. The purpose of the amendment was to apply Section 53 rationally and not blanketly. Section 53[5] talks about distribution of proceeds from the sale of the liquidation assets shall be distributed in a particular order of priority as provided in the section.
  3. Voting threshold is reduced from 75% to 50% for the decisions of Committee of Creditors (CoC). So, if more than half of these creditors who are present approve a plan, it will be considered that the entire class of creditors has approved it.Whereas certain key decisions like appointment of resolution professional, approval of the resolution plan and increasing time limit for insolvency resolution process threshold has been reduced from 75% to 66%.
  4. Under Real Estate Projects, homebuyers are now part of financial creditors. Now as per section 7[6], which is on Initiation of corporate insolvency resolution process by financial creditor, homebuyers are also categorised as financial creditors. The government has also addressed a longstanding demand of homebuyers who have filed cases against builders for non-delivery of flats. A proposed amendment will ensure that a majority vote from creditors such as homebuyers will be counted as a 100% vote from that class of creditors in favour of or against a resolution plan.
  5. The amendment adds a clarification that a plan will be binding on all stakeholders including the central and any state government or a local authority which has dues from a corporate debtor. National Company Law Tribunal in the case of ‘Standard Chartered Bank v Essar ltd[7]’ has held that the CoC had no role in distribution of claims, and brought lenders (financial creditors) and vendors (operational creditors) on a par. This proposal in the amendment bill is intended to reiterate the position of creditors in a liquidation process under Section 53 of the code by giving a secured creditors higher priority over the unsecured and other operational creditors[8]. So, if if out of 100 homebuyers, half or more of those present and voting back a resolution plan, then all homebuyers would be considered to have voted for it.
  6. The amendment has also sought to reduce delays at the beginning of insolvency proceedings initiated by financial creditors by requiring NCLT benches to explain why an application has not been admitted or rejected within fourteen days. The proposed amendments also seek to enhance the flexibility available to applicants by clarifying that a resolution plan may include corporate restructuring programmes such as mergers, demergers and amalgamation[9].

Footnotes:

[1] Objective section of the code

[2] 3 Resolving Insolvency – Doing Business – World Bank Group, Available at:

http://www.doingbusiness.org/data/exploretopics/resolving-insolvency

[3] Press Release, Insolvency and Bankruptcy Code (Amendment) Bill, 2019  Available at: https://ibbi.gov.in/uploads/whatsnew/press_release_of_IBC_Code-1.pdf

[4] Ibid

[5] Distribution of assets given under Section 53, Insolvency and Bankruptcy Code, 2016 accessed at < https://ibclaw.in/section-53-distribution-of-assets/ >

[6]http://www.mondaq.com/india/x/623128/Insolvency+Bankruptcy/Application+Under+Section+7+A+Brief+Analysis

[7] ‘Standard Chartered Bank Ltd. and Ors. vs. Essar Steels India Limited (02.08.2017 – NCLT – Ahmedabad) : MANU/NC/0692/2017’

[8]  Retrieved from : – https://economictimes.indiatimes.com/news/economy/policy/government-approves-7-amendments-to-insolvency-law/articleshow/70260805.cms

[9] Ibid.

Author:

Himanshu Mishra
4th year student at National Law University, Delhi
email:
himanshu.mishra16@nludelhi.ac.in

Disclaimer:

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