Introduction

The Insolvency and Bankruptcy Code, 2016 (“Code”) is one of the most significant economic legislations in India in recent times which has introduced sweeping changes to the insolvency law regime. Being at a nascent stage, the Code has had ‘teething problems’. Various issues are being litigated before the different benches of the National Company Law Tribunal (“NCLT”), National Company Law Appellate Tribunal (“NCLAT”) as well as before the Supreme Court. These matters have led to delays in various corporate insolvency resolution processes (“CIRP”). Seeking to address the issues that have cropped up, the Government of India has issued the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) to amend the Code. The Ordinance received the President’s assent and was published on June 6, 2018.

The following is a snapshot of some of the key changes which have been made to the Code pursuant to the Ordinance. 

Home-buyers to be treated as Financial Creditors; Can vote in CoC meetings; On liquidation, will be at a higher position in the distribution waterfall

Home-buyers (allottees) from whom amounts have been raised under a real estate project would now be considered as financial creditors and the amounts raised from the allottees are now deemed to be a financial debt.

As financial creditors, some of the benefits which home buyers would enjoy are as follows:

• right to file an application for initiation of an insolvency resolution process against the developer;
• right to participate and vote at meetings of committee of creditors (“CoC”) and thereby being part of the decision making process for approving or rejecting a resolution plan and for other matters which require CoC’s approval;
• entitled to receive at least the liquidation value due to them under a CIRP; and
• in case of a liquidation, right to receive distribution proceeds (if any remaining) before payment of Government dues, operational unsecured creditors and shareholders.

The manner in which home-buyers will be represented in meetings of CoC is expected to be detailed in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The Ordinance indicates that an insolvency professional may be separately appointed by NCLT for a class of creditors to act as their authorised representative.

Withdrawal of application for initiation of CIRP only before EoI; Late bids not allowed; Mandatory timelines

NCLT can allow withdrawal of an application which was admitted for initiation of a CIRP, if 90% (ninety percent) of the voting share of the CoC approve the same. Though under the existing rules, NCLT could permit withdrawal of the application for initiation of CIRP before the same gets admitted, there was no provision expressly allowing withdrawal after admission.

The manner in which withdrawal will be permitted would be prescribed. Hence, one would have wait for the rules and regulations which would be promulgated in this regard. An indication of the same can be found in the press release issued by the Government at the time of promulgation of the Ordinance. The press release states that such withdrawal will only be permissible before publication of notice inviting expressions of interest (“EoI”). In other words, there can be no withdrawal once the commercial process of EoIs and bids commences. Separately, the press release states that the regulations will bring in further clarity by laying down mandatory timelines, processes and procedures for CIRP. Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets. Pursuant to the Ordinance, the Central Government has been given the power to issue rules for the manner of withdrawal of an application.

Moratorium not applicable to a guarantor

Once a CIRP commences in respect of a corporate debtor, a moratorium is declared, inter alia, prohibiting any enforcement of security.

The issue of whether a moratorium which is declared in respect of a corporate debtor would also apply to a guarantor, has been the subject of litigation. There has been a divergence of views in this regard between the various benches of the NCLTs. NCLAT has held that the moratorium would apply to the assets of a personal guarantor. The matter is now before the Supreme Court.

Pursuant to the Ordinance, the provision of moratorium would not apply to a guarantor.

Threshold for approving resolution plan by CoC reduced from 75% to 66%

Pursuant to the Ordinance, a resolution plan now requires the approval of 66% (sixty six percent) of the voting share of financial creditors instead of the earlier requirement of 75% (seventy five percent).

Also, routine decisions can be taken by the CoC by a 51% (fifty one percent) majority vote instead of the earlier requirement of 75% (seventy five percent).

Resolution Professional responsible for compliance of   all laws

Under the Code, once a CIRP commences against a corporate debtor and an interim resolution professional is appointed, the powers of the board of directors (“Board”) of the corporate debtor stand suspended and such powers are exercised by the resolution professional. The management of the affairs of the corporate debtor vests in the resolution professional. The Ordinance provides that the resolution professional shall be responsible for complying with the requirements of all laws on behalf of the corporate debtor.

Resolution Professional to continue till receipt of NCLT’s approval even if 270 days (CIRP Period) has expired

Under the Code, the resolution professional is required to manage the operations of the corporate debtor during the corporate insolvency resolution process period (“CIRP Period”). ‘Insolvency resolution process period’ has been defined as a period of 180 (one hundred eighty) days commencing from the insolvency commencement date. This period can be extended by a further period of 90 (ninety) days. However, there have been cases where a resolution plan has been approved by the CoC within the CIRP Period and the plan has been submitted to NCLT for its approval before the expiry of the CIRP Period. However, approval of NCLT was not received prior to the expiry of the CIRP Period, but was received after the expiry of such period. In these cases, the issue that arose was whether the Board stays suspended and the resolution professional continues after expiry of the CIRP Period if approval of NCLT is not received before the expiry of such period. The Ordinance brings about a much needed clarity in this respect. The Ordinance states that if a resolution plan has been submitted to NCLT for its approval, then the resolution professional will continue to manage the operations of the corporate debtor even after the expiry of the CIRP Period until approval of the resolution plan by NCLT.

Disqualification on the ground of conviction has been  limited

Section 29A(d) of the Code disqualified a person from submitting a resolution plan if the person or its connected person or any person acting jointly or in concert with such person had been convicted for any offence punishable with imprisonment for 2 (two) years or more. The said criteria was quite sweeping in as much as any conviction under any law and in any country would get covered. The Ordinance has amended the said provision.

Henceforth, a person will be disqualified from submitting a resolution plan if the person has been convicted for an offence punishable with imprisonment for 2 (two) years or more only under specified laws which have been listed in a schedule to the Code. The legislations listed in the schedule are mainly laws in India relating to tax, foreign exchange, securities market, environment protection, black money, corruption, benami property, competition law, companies law and insolvency law. In respect of other laws, a person will be disqualified from submitting a resolution plan if the person has been convicted for an offence punishable with imprisonment for 7 (seven) years or more. After the expiry of a period of 2 (two) years from the date of his release from imprisonment, the aforesaid disqualification will not apply.

Limitation Act to apply to proceedings or appeals before NCLT and NCLAT

The issue of whether the Limitation Act, 1963 (“Limitation Act”) would be applicable to proceedings before NCLT and NCLAT has been hugely debated and have been the subject of divergent views of different benches of the NCLT and NCLAT.

The issue arose due to applications being made by creditors before NCLT for claims which would otherwise be time-barred under the Limitation Act. The Ordinance brings about a much-needed clarity in this regard by stating that the Limitation Act would apply to proceedings or appeals before the NCLT, NCLAT, the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal.

Consent of shareholders not required

Often a resolution plan provides for matters which would ordinarily require consent of shareholders under the Companies Act, 2013 or regulations framed by the Securities and Exchange Board of India or under articles of association or pursuant to a shareholders agreement. These matters could relate to issuance of new shares, mergers, capital reduction, buy-back etc. The issue that arose was whether approval of shareholders would also be separately required for such matters. It was argued that since section 31 of the IBC provides that once a resolution plan is approved by NCLT, it will be binding on the shareholders of the corporate debtor, no separate approval of the shareholders would be required.

Further regulation 39(6) of the CIRP Regulations provides that a provision in a resolution plan which would otherwise require the consent of the members of the corporate debtor under the terms of the constitutional documents, shareholders’ agreement, or other document of a similar nature, would take effect notwithstanding that such consent has not been obtained. However, the said regulation does not mention about the requirement of consent of shareholders under specific laws.

To address the issue, the Ministry of Corporate Affairs issued a circular (General Circular No. IBC/01/2017) dated October 25, 2017 (“MCA Circular”) clarifying that approval of shareholders of the corporate debtor for a particular action required in the resolution plan which would have been required under the Companies Act, 2013 or any other law, if the plan was not being considered under the Code will be deemed to have been given on its approval by NCLT. Though the MCA Circular clarified the issue, considering that it was a circular and a similar provision was not present in the Code, there was an ambiguity as to whether consent of shareholders should also be taken if required under other laws.

The Ordinance has cleared the air on this issue. If any approval of shareholders is required under the Companies Act, 2013 or any other law, for the implementation of actions under the resolution plan, then such approval will be deemed to have been given.

Resolution applicant required to obtain necessary approvals pursuant to the resolution plan approved by NCLT

The Ordinance provides that after approval of a resolution plan by NCLT, the resolution applicant shall obtain the necessary approvals required under any law within 1 (one) year from the date of approval or within such period as provided for in such law, whichever is later. The amendment is a significant one as it allows a resolution applicant more time to obtain approvals under other laws even if the other law prescribes a time period of less than 1 (one) year. The amendment also indicates that if an approval is required from another authority for any matter provided for in the resolution plan, then such approval would have to be obtained, and NCLT may not be a single window clearance mechanism for obtaining approvals under all laws.

Disqualification under section 29A regarding NPAs not applicable to a financial entity

Section 29A(c) of the Code disqualifies a person from submitting a resolution plan for the insolvency resolution of a corporate debtor undergoing a CIRP, if such person has, at the time of submission of a resolution plan, an account or has an account of a corporate debtor which is under its management and control, or is a promoter of such a company, which is classified as a non-performing asset (“NPA”). Pursuant to the Ordinance, pure play financial entities have been exempted from this provision. For example, if a financial entity acquires a significant stake in a company pursuant to conversion of its loan, and such company is classified as an NPA, then the financial entity will not be disqualified to submit a resolution plan.

Notably, in order to be considered a ‘financial entity’ for availing the benefit of the above exemption, an entity has to fall within the following categories and should meet such criteria which the Government would notify:

a. a scheduled bank;

b. any entity regulated by a foreign central bank or a securities market regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organization of Securities Commissions Multilateral Memorandum of Understanding;

c. any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor ;

d. an asset reconstruction company;

e. an alternate investment fund registered with the Securities and Exchange Board of India;

f. such categories of persons as may be notified by the Central Government.

Apart from the above relaxation, financial creditors regulated by a financial sector regulator, who become a related party of a corporate debtor solely on account of conversion or substitution of debt into equity shares prior to the insolvency commencement date will no longer be barred from being a member of a CoC and vote at meetings of the CoC.

Disqualification under section 29A not to apply to MSMEs

Section 29A was introduced in the Code pursuant to an ordinance in November 23, 2017. Notably, as discussed above, under sub-section (c), a person is disqualified to submit a resolution plan if the person or any other person acting jointly or in concert with such person, has an account which is classified as an NPA or if such person is a promoter or in management or control of a corporate debtor whose account has been classified as an NPA and 1 (one) year has lapsed from the date of classification till the date of commencement of the CIRP of the corporate debtor. However, such persons can submit a resolution plan if they make payment within such period decided by the COC (not exceeding 30 days) of all overdue amounts with interest thereon and charges relating to NPA accounts before submission of resolution plan. Also, under sub-section (h) of section 29A, a person is disqualified if the person has executed a guarantee in favour of a creditor in respect of a corporate debtor against whom an application for insolvency resolution made by such creditor has been admitted under the Code and such guarantee has been invoked by the creditor and remains unpaid.

Thus, existing promoters of defaulting companies undergoing a CIRP were effectively kept out of the process and they could not bid for the companies. However, it has been seen that in case of small and medium enterprises, it is usually only the promoters who would be interested in acquiring the company. Also, keeping promoters of such companies out of the process could impede a proper price discovery. Hence, pursuant to the amendment to the Code vide the Ordinance, the disqualification criteria in sub-sections (a) and (h) of section 29A of the Code would not apply in respect of a CIRP of any micro, small and medium enterprises (“MSME”) as defined in the Micro, Small and Medium Enterprises Development Act, 2006. Wilful defaulters would still be disqualified.

However, it is pertinent to note that the way MSMEs are defined under the Micro, Small and Medium Enterprises Development Act, 2006, only a limited number of companies would be covered under the above exemption. For example in the manufacturing sector, a medium enterprises would be one where the investment in plant and machinery is not more than Rs. 10 crores.

Disqualification under section 29A not to apply if it is because of acquiring a corporate debtor undergoing CIRP

Section 29A of the Code, as discussed above, contains various disqualification criteria. One criteria is that an applicant cannot have an NPA account. Another criteria is that an applicant should not be a promoter of a company or be in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place. However, there could be an instance where a person acquires a corporate debtor under a resolution plan approved by NCLT. In such instance, the acquirer could get disqualified under section 29A of the Code because the corporate debtor acquired by the acquirer would satisfy the criteria, though the acquirer acquired the company pursuant to a resolution plan approved by NCLT.

The Ordinance seeks to relax the disqualification criteria for such persons under section 29A of the Code.

The Ordinance provides that if a person has an account, or is in the management or control of a corporate debtor whose account is, or is a promoter of a person whose account is, classified as an NPA, and such account was acquired pursuant to a prior resolution plan approved under the Code, then  the person can still submit a resolution plan if it is within a period of 3 (three) years from the date of approval of such resolution plan by NCLT. Also, if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of a corporate debtor by the applicant pursuant to a resolution plan approved under the Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and the applicant has not otherwise contributed to such transactions, then the disqualification pertaining to such transactions would not apply.

This note has been written by Adity Chaudhury (Partner).