ANALYSIS OF INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2020

Neelakshi Bhaskar

Introduction

The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by Lok Sabha on March 6 and by Rajya Sabha on March 12 and received the assent of the President of India on March 13. The Bill replaces the ordinance of 2019[1]. The Bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. The Bill will play a vital role for successful bidders of insolvent companies from risk of criminal proceedings for offences committed by previous promoters. It also aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners[2].

Insights of Insolvency and Bankruptcy Code before the Amendment of 2020

  • The Code was first enacted in December, 2016 to consolidate the laws related to reorganisation and insolvency resolution in India and to ensure a time-bound resolution of insolvency, resulting in maximisation of value of the assets of concerned stakeholders, promotion of entrepreneurship, and ensuring greater availability of credit and balancing the interests of all stakeholders concerned.
  • The code created various institutions to facilitate resolution of insolvency, such as:
  • Insolvency professionals;
  • Insolvency professional agencies;
  • Information utilities;
  • Adjudicating authorities;
  • Insolvency and Bankruptcy Board[3];
  • Homebuyers could initiate insolvency against the real estate developer and the right to be represented in the Committee of Creditors (COC). Thus, an immunity being provided to the retail consumers in the real estate industry.
  • By virtue of a new section i.e. 29A, the wilful defaulters, the persons actually responsible for financial failure of the corporate sector were disqualified from being resolution applicants[4].
  • The process of initiation of insolvency for the foreign suppliers and vendors i.e. obtaining a certification from an Indian Financial Institution eased from the perspective of the trade creditors/operational creditors.
  • Three-fourth majority required to pass a special resolution before initiation of corporate insolvency resolution process by the corporate debtor.
  • Moratorium of 180 days was not applicable to a surety in a contract of guarantee. The scope of the moratorium is restricted to the assets of the corporate debtor only. Therefore, there is no bar against enforcement actions taken against the assets of a guarantor to a corporate debtor during the moratorium period.
  • To ensure the speedy resolution, voting thresholds were relaxed for certain decisions taken by COC.
  • By virtue of new provision, the debenture holders, deposit holders, retail creditors and other specified classes of financial creditors to be represented by separate trustee, agent, authorised representative or insolvency professional in the COC meetings.
  • A specific exemption to a promoter who was a wilful defaulter can bid for Micro Small Medium Enterprises’ in insolvency.
  • Before the applicability of Limitation Act, 1963 to the insolvency proceedings was not clear but the ambiguity is now clear and the Limitation Act would apply to proceedings under this code[5].

Analysis of Insolvency and Bankruptcy Code (Amendment) Act, 2020

  • An additional immunity given to certain classes of financial creditors, including allottees of real estate projects to initiate resolution process but only with a condition that 10% of them or 100 such persons can jointly initiate the resolution process to prevent individual allottees from initiating the CIRP against real estate developers. This is same as another immunity but the only difference being is, in the other case, the creditor will not be able to maintain an application for insolvency against a corporate debtor individually. This is provided by way of inserting three provisos in sub-section(1) of section 7, further it puts a third condition which is related to pending applications, according to which the applicants are required to modify the applications to fulfil the requirements of proviso 1st and 2nd. And if the applicants do not adhere to the same within 30 days of the commencement of Amendment Act then the application stands withdrawn.   
  • The amendment has clarified that the insolvency commencement date would be when the Insolvency Resolution Professional (IRP) was appointed on the date of application by National Company Law Tribunal.
  • It empowers the resolution professional to require suppliers to continue providing goods and services during the moratorium period. This provision overrides the agency of suppliers to negotiate and decide whether to continue a contractual arrangement. It may also force supply of goods and services even if the supplier finds it risky or unviable.
  • To ensure fairness with the suppliers’ rights, the Amendment act provides that the suppliers will continue to supply only if their current dues are paid.  
  • If the company pays the current dues regularly during the process then the current licenses, permits and registrations cannot be cancelled because of insolvency.
  • With this amendment the non-applicability of moratorium shall be notified by the Central Government in consultation with any financial sector regulator or any other authority.
  • A proviso is inserted in Section 23 of the code which states that the Resolution Professional shall continue to be responsible for the affairs of the corporate debtor for the time period beginning after the conclusion of the Corporate Insolvency Resolution Process and up to the time when either a successful resolution plan has been approved by the AA or a liquidator has been appointed by the AA.
  • One important immunity has been provided to the corporate debtors by way of introduction of Section 32A. This section states that if any offences committed by the corporate debtors before the commencement of CIRP would automatically discharge and no action would be taken against the corporate debtors, successful resolution applicants or persons acquiring assets in liquidation. But this immunity is not available to partners of Limited Liability Partnership and to officers who are in default in case of companies.
  • The Insolvency and Bankruptcy Board of India has amended the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2016 in 2020[6].

Conclusion

The changes brought into the code has eased the problems of insolvency at various levels but still there is a long way to go. The Amendment Act will result in fair valuation of Assets of corporate debtors, will strengthen the procedure by promoting entrepreneurship and availability of credit and improvement in the position of stakeholders by keeping the balance on both ends. But still with the changing needs of the corporates many more Amendments would make a way through to strengthen the Insolvency and Bankruptcy Code.


[1] “https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.Pdf”

[2] Devika and Bhardwaj P, “Parliament Receives President’s Assent for — Insolvency and Bankruptcy Code (Amendment) Act, 2020” (SCC BlogMarch 17, 2020) <https://www.scconline.com/blog/post/2020/03/14/parliament-receives-presidents-assent-for-insolvency-and-bankruptcy-code-amendment-act-2020/&gt; accessed May 6, 2020

[3] “https://www.mca.gov.in/ministry/pdf/theinsolvencyandbankruptcyofindia.pdf”

[4] “https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/aug/the insolvency and bankruptcy Code (Second Amendment) Act, 2018_2018-08-18 18:42:09.Pdf”

[5] . T, “The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2018: Key Highlights – Insolvency/Bankruptcy/Re-Structuring – India” (Articles on All Regions including Law, Accountancy, Management Consultancy IssuesJuly 3, 2018) <https://www.mondaq.com/india/insolvencybankruptcy/714484/the-insolvency-and-bankruptcy-code-amendment-ordinance-2018-key-highlights&gt; accessed May 8, 2020

[6] “The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019” (PRSIndiaMarch 13, 2020) <https://www.prsindia.org/billtrack/insolvency-and-bankruptcy-code-second-amendment-bill-2019&gt; accessed May 9, 2020