The Union Cabinet had on 17th July 2019 approved the proposal to introduce a bill in the parliament to carry out amendments to the IBC. Essentially, the intention of the cabinet was to fill critical gaps in the corporate insolvency resolution framework while simultaneously maximizing value from the corporate insolvency resolution process. As on August 1, 2019, the bill[i] was passed by both the parliamentary houses, and the changes brought to the code are analyzed in the article.
- Changes To The Code
The amendments will bring in clarity on allowing comprehensive corporate restructuring schemes such as mergers, demergers, amalgamations etc. as part of the resolution plan. In section 5(26) of the code – “resolution plan” means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern in accordance with Part II. Now, the resolution plan as defined under the IBC will also include provisions for restructuring.
Under the IBC, a financial creditor can by itself or jointly with other financial creditors file an application for the purposes of initiating corporate insolvency resolution process against the corporate debtor before the Adjudicating Authority. Essentially an application is required to be filed for such a process. The Adjudicating Authority is within 14 days of the receipt of application required to ascertain such a default. Currently, post the amendments, if the Adjudicating Authority does not pass an order ascertaining the existence of default, then it will be required to give reasons in writing for the same. This amendment clearly is aimed at revamping the application stage by increasing accountability of the Adjudicating Authority. At the same time, this would potentially result in the required time bound disposal.
Prior to the amendments, the corporate insolvency resolution process was required to be completed within a period of 180 days from the date of admission of the application to initiate such process. The Adjudicating Authority could extend the duration of such period by 90 days if it was satisfied that the subject matter of the case was such that corporate insolvency resolution process could not be completed within 180 days. After the passage of the bill, the entire process will have to be completed within 330 days including any extension given or any litigation. Companies will have to be sent for liquidation if the resolution process breaches this 330-day window. Therefore, this will hasten the process.
The 2018 amendment to the code brought in section 21(6A) under which certain representatives are required to act on behalf of the financial creditors to the extent of the voting share of the creditors. Now post the amendments, the votes of all financial creditors covered under the section will be cast in accordance with the decision approved by the highest voting share (more than 50%) of financial creditors on present and voting basis.
Another major difference, or rather addition post the amendments will be to section 30 of the code, under which the resolution professional will have to ensure that that financial creditors (who have not voted in favor of the resolution plan) and operational creditors, shall receive at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with section 53 of the Code, or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with section 53 of the Code, whichever is higher. This will have retrospective effect where the resolution plan has not attained finality or has been appealed against.
The IBC requires that the Adjudicating Authority pass a liquidation order, when the resolution professional at any time during the corporate insolvency resolution process, but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors to liquidate the corporate debtor. Now, the committee of creditors may take the decision to liquidate the corporate debtor any time after the constitution of the committee of creditors (i.e. under section 21) until the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.
If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors meets certain requirements then, it shall by order approve the resolution plan, which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. After the amendments, the “Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,” shall also come under the binding ambit of the resolution plan.
Lastly, there will be inclusion of commercial consideration in the manner of distribution proposed in resolution plan, within the powers of the committee of creditors. Therefore, the committee of creditors will have the power to take commercial decisions on distribution of funds to various classes of creditors.
- Conclusion
The amendments might lead to a wide range of constructive impacts especially in terms of timely disposal. For instance, improvement can be anticipated with respect to timely completion of resolution process. Although prima facie, the code appeared to provide for speedy completion of the resolution plan, however, in practice, the litigation and legal proceedings involved took far more time than the 270 days deadline imposed by the code. This could be attributed to those in control in the insolvent companies including the promoters actively attempting to maintain control, and therefore delaying the resolution process. Hence, the proposed amendments would bring in progressive change for those seeking timely disposal of the corporate insolvency resolution process.
Interestingly, the majority votes of creditors required with respect to the favor of or against the resolution plan will have positive effect on certain classes of creditors. There are many home–buyers who have filed complaints against builders for non-delivery of flats.[ii] Now a majority vote from such creditors will be the ground for favoring the resolution plan. This would consequently have an impact on cases like Jaypee Infratech Ltd. where the home-buyers have a 58% voting share on the panel of creditors.[iii]
In effect, the amendment regarding financial creditors (who have not voted in favor of the resolution plan) and operational creditors receiving the amount of money, that they would have received under liquidation proceedings (with respect to section 53) is against the recent NCLAT order[iv] regarding resolution for Essar Steel. The NCLAT had held that the various classes of creditors will be treated equally, and the amendments will ensure that the creditors will at the minimum receive proceeds out of the resolution plan as they would be given if the proceeds were to be distributed on a priority basis under the IBC.
Further
notably, regarding the binding value of the resolution plan on the state and
central government, there will potentially be an affirmative process. State
government officials will not be able to cause any roadblocks to the process,
and it will be enforced with limited hindrances. Therefore, in summation, the
amendments will lead to a more streamlined and efficient corporate resolution
insolvency process.
[i] https://www.ibbi.gov.in/uploads/whatsnew/bill
[ii] https://economictimes.indiatimes.com/wealth/real-estate/over-70-home-buyers-will-file-complaint-against-builder-under-rera-for-possession-delays-survey/articleshow/69646675.cms
[iii]http://www.jaypeeinfratech.com/communication/2019/Appeal_to_Home_Buyers_of_Jaypee_Infratech_Limited_to_vote_on_Agendas_put_forth_in_the_CoC_Meetings.pdf
[iv] https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jul/Essar Steel_2019-07-04 16:25:31.pdf
This article is written by Amogh Sharma of HNLU, Raipur
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