INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE 2018

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[First published in NUALS CPSRL IBC E-Newsletter Volume I available at http://www.nuals.ac.in/common/468Vol%20I-NUALS%20IBC%20E-NEWSLETTER.pdf]

INTRODUCTION
The President of India assented to promulgate the Insolvency and Bankruptcy Code (Amendment Ordinance) 2018 (No. 6 of 2018) on June 06, 2018. This Amendment will supersede the Insolvency and Bankruptcy (Amendment) Act, 2018 dated January 18, 2018 and will be in furtherance of the Insolvency and Bankruptcy Code (Removal of
Difficulties) Order 2017.

The new Amendment comes in the light of the need to: firstly, to balance the interest of
stakeholders in the Code (especially, homebuyers and promoters of micro, small and medium enterprises); and secondly, to promote resolution over liquidation of Corporate Debtor and thirdly, to streamline the provisions relating to the eligibility of resolution applicants.

HOME BUYERS ARE NOW FINANCIAL CREDITORS
The Amendment, by introducing Explanation to Section 5(8), deems home buyers as financial creditors, thereby giving them representation in the Committee of Creditors (“CoC”) and a say in the decision-making process during the Corporate Insolvency Resolution Process. It also enables them to invoke Section 7 of the Code against defaulting developers.

LEEWAY FOR MICRO SMALL AND MEDIUM ENTERPRISES
Newly introduced Section 240A empowers the Central Government to introduce further
exemptions from the Code to MSMEs, if required, in public interest, considering their significance to the economy. MSMEs are exempted from two disqualifications applicable to resolution applicants:

  • If the associated account being declared as NonPerforming Asset (“NPA”) under clause (c) of Section 29A; and
  • If it has executed an enforceable guarantee in favor of a creditor in respect of corporate debt against which an application for Insolvency resolution made by such creditor has been admitted under this Code.

PROMOTING RESOLUTION OVER LIQUIDATION
In order to promote Corporate Insolvency Resolution Process, voting thresholds have been altered as follows:

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http://www.nuals.ac.in/common/468Vol%20I-NUALS%20IBC%20E-NEWSLETTER.pdf

The Amendment lays down that, even upon the expiry of the CIRP period after the resolution plan under Section 30(6) has been submitted, the Resolution Professional should continue to manage the operations of the Corporate Debtor until an Approval Order is passed by the Adjudicating Authority. It also provides for a one-year grace period for the successful resolution applicant to fulfil various statutory obligations required under different laws.

COMMITTEE OF CREDITORS (CoC)
The Ordinance further restricts withdrawal of applications, after admission, and permits the same only with the backing of 90% of voting share of the CoC. The Ordinance provides for a mechanism to allow the participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in the meetings of the CoC, through authorised representative(s). Prior to this Amendment, all financial creditors of the Corporate Debtor were required to be represented in the CoC. However, this Amendment bars a related party (defined comprehensively by insertion of Section 24A to the Code) to whom a Corporate Debtor owes a financial debt from having any
representation, participation or voting rights in the meetings.

OTHER NOTABLE CHANGES
The Ordinance has amended Section 29A of the Code to relieve pure play financial entities from disqualifications. Similarly, it has provided a three-year cooling-off period from the date of such acquisition for a resolution applicant holding NPA, by virtue of acquiring it in the past under the Code.

In view of the wide array of disqualifications contained in Section 29A, the Amendment now requires the resolution applicant to submit an affidavit certifying its eligibility to take part in the process.

COMMENTS
Prior to this amendment, several loopholes existed in the law. This Amendment is a step ahead in the right direction. Interpretation of the Courts in terms of homebuyers would further clarify their status in the Insolvency Resolution Process.

Manal Shah

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