Amendments in Insolvency and Bankruptcy Code

Introduction

Insolvency and Bankruptcy Code (IBC) was enacted in 2016 with the objective of maximization of the value of assets of the corporate persons, partnership firms and individuals within a time bound manner so as to promote entrepreneurship and availability of the assets and to balance the interest of all the stakeholders. For this various regulation have been made which will laid down the rules to be followed by the insolvency professional and the authorities appointed under the Act to fulfil the functions of the Code. However, each Code need to be amended time to time so that the loopholes in the code can be covered and better implementation of the laws can take place and maximizing the benefit of the laws to the larger beneficiaries. Thus, this article will deal with the amendments in insolvency and Bankruptcy Code.

First Amendment: Insolvency and Bankruptcy Code (Amendment) Act, 2018

The first amendment ordinance bill was presented on 23rd November 2017 which    received the assent of president on 18th January 2018. The main reason of making of such amendments to the code was to restrict certain category of person for submitting of the resolution plan because they can affect the interest of the creditors. The amendments made through this ordinance are as follows:

1. The first amendment to the Code was made to change the clause (e) of Section 2 of the Code. Earlier the clause limited the application of the Code only to partnership firms and individuals, then the amendment was made so as to include various other categories under the ambit of the Code. The categories which are included under the scope of this section by way of the amendment are as follows:
2. Personal Guarantor to the Corporate Debtor.
3. Partnership Firms and Proprietor Firms.
4. Individuals, other than the personal guarantor.
5. Further, the scope of Section 5 of the Code was widened by including the definition of Resolution Applicant under the Code. Earlier only the power of the resolution applicant was there under clause (25) of the Code, now after the amendment being made the definition of resolution applicant has been laid down by the Code. Now, clause (25) of Section 5 of the Code states as under:

“Resolution Applicant means a person, who individually or jointly with any other person, submits the resolution plan of the resolution professional pursuant to the invitation made under clause (h) of Section 25 of the Code.”[1]

• A new Section 29A has been included by the way of amendment in the Code. This clause puts the restrictions on certain categories who will not be eligible for resolution applicant. The clause itself widened the scope of connected person in its explanation part. The new section restricted eight categories of person along with their connected person to become a resolution applicant and submit the resolution bids and also it restricted them to participate in making of the bids for IBC resolution plan, it further restricted them to being associated with the debtor firm while the IBC resolution plan is being implemented. The term connected person under the explanation of the section includes the promoters, holding and subsidiary companies, associate companies, persons in management, persons in control as well as related parties.[2]
• Amendment in clause (4) of section 30 has been made through this ordinance. Earlier, under clause (4) the committee of creditors was eligible to approve the resolution plan by not less than 75% of voting share of the financial creditors. The amendment has been made to this particular clause of Section 30 in order to give effect to such cases after the insertion of section 29A. Now the clause (4) of section 30 read as follows:

“The committee of creditors may approve a resolution plan by a vote of not less than seventy five percent of voting share of financial creditors, after considering its feasibility and viability, and such other requirements as specified by the Board:

Provided that the committee of creditors shall not approve a resolution plan submitted before the Insolvency and Bankruptcy (Amendment) Ordinance, 2017, where the resolution applicant is ineligible under section 29A and may, where no resolution plan is available with it, require the resolution professional to submit a fresh resolution plan”[3]

• A new section 235A has been included by way of this ordinance so as to laid down the provision of punishment in such cases where no penalty or punishment is being given under the Code. As per this section, if any person violates the provision of the Code then he or she will be liable to pay penalty of Rs. One Lakh which can be further extended to two crore rupees.

Effect of Amendment

The Ordinance closes out a huge part of the advertisers from the IBC offering process, not simply the willful defaulters. When precluded from submitting offers for their own organizations, the advertisers have minimal motivator to co-work with the RPs and offer pertinent data utilizing which the RPs can look for expected offers. With the amendment being took place the promoters became ineligible to buyback in their respective firms once such firm enters into the process of IBC.

It further disqualifies those defaulters who are having NPA for more than 12 months from bidding during the process of IBC. The oordinance may adversely affect the recovery rate in the IBC process, banks may no longer have the incentive to trigger IBC to begin with. This Ordinance puts at risk even the out-of-court settlements with the eight categories of disbarred participants.[4]

Second Amendment: Insolvency and Bankruptcy (Second Amendment) Act, 2018

The second amendment took place to secure the interest of the stakeholders, homebuyers and micro, small and medium enterprises (MSME). It further lowers down the threshold limit of the voting share of committee of creditors and designed the provision related to the resolution applicant. The ordinance bill for this amendment was presented on 6th June 2018 and received the assent of the president on 17th August 2018. The provisions which are amended through this ordinance are as follows:

1. Section 3(12) of the Code laid down the definition of the term “default”, amendment has been made under this clause to change the word from repaid to paid. Now the clause can be read as follows:
   1. “default means nonpayment of debt when whole or any part or installment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor as the case may be”[5]
2. A new clause (5A) has been inserted after clause (5) in section 5 of the code by way of this amendment to laid down the definition of the term “corporate debtor”. The new section will be read as follows:
   1. “corporate guarantor means a corporate person who is surety in a contract of guarantee to a corporate debtor”.[6]
   1. Further, after clause (24) of same section, a new clause has been added clause (24A) which laid down the definition of related party in relation to individual. The term includes the person who is relative of the individual or relative of spouse of the individual, partner of limited liability partnership, trustee of a trust, private company in which the individual is director and holds along with his relatives more than 2% of its paid up share capital, public company in which individual is director and holds along with his relatives more than 2% of its paid up share capital, a body corporate or LLP whose director, managing director or manager acts on the advice, directions or instructions of the individual, a company where the individual or the individual along with its related party own more than 50% of share capital of the company or controls the appointment of the board of directors of the company.[7]
3. Section 10 of the Code laid the process of initiation of CIRP by corporate applicant, amendment has been made to clause (3) of the section. The amendment makes clear about the documents that has to be furnished by the corporate applicant along with the application that has to be filed for CIRP. The clause now read as follows:

            “the corporate applicant shall along with the application furnish-

1. The information relating to its books of account and such other documents for such period as may be specified
2. The information relating to the resolution proposed to be appointed as an interim resolution professional and
3. The special resolution passed by the shareholders of the corporate debtor or the resolution passed by at least 3/4th of the total number of partners of the corporate debtor as the case may be approving filing of the application.”[8]
4. Further the amendment is made to section 12 of the code regarding the withdrawal of the application filed under section 7 (by financial creditor), section 9 (by operational creditor) or section 10 (by corporate debtor). Now the application can be withdrawn if approval of committee of creditors is given with 90% of their voting share.
5. Under Section 16 (5) of the code, the interim resolution professional will hold the office till the appointment of resolution professional under section 22 of the code.
6. By including section 25A, the rights and duties of the authorized representative of the financial creditor is specified.
7. Earlier, to remove the resolution professional, 75% voting share of committee of creditor was required. Now the amendment reduced the percentage to 66% voting share of committee of creditors required for removal of resolution professional.
8. A new section 240A has been inserted to laid down the applicability of the code on MSME sector.
9. For the purpose of section 29A which specifies the list of persons not eligible to be resolution applicant, a new schedule has been added to the code.

Effect of Amendment

By replacing the term “repaid” by “paid”, it widened the scope of definition of operational debtor. The term “payment” can be defined as “performance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation”.[9]

If one failed to pay the interest then it will be considered as default in payment of interest and not in repayment of interest. Further, the assets of personal guarantor of corporate debtor or corporate will not be eligible to get protection under Section 14 which laid down the provision regarding imposition of moratorium period. The term related party clarified the persons that are covered under this provision.  The process of withdrawal of application is permitted only when the same has been approved by 90% voting share of committee of creditors. The tenure of interim resolution professional has been extended so that the insolvency process will not be hauled.

Under Section 5(8) the term financial debt also includes the provision for home buyers. The home buyers will be considered as unsecured financial creditor under the provisions of Section 53 of the code. Further, the amendment also clarified that the authorized representatives of the financial creditors as mentioned under the code are eligible to file the application for CIRP on their behalf. It also specified the rights and duties of such authorized person.

Hence, overall, it can be said that this amendment has clarified various procedural as well as substantial clauses of the code so as to continue the easement in the process of insolvency.

Third Amendment: The Insolvency and Bankruptcy (Amendment) Act, 2020

The objective of this amendment to insolvency and bankruptcy law was to prevent the property of the corporate debtor, to provide immunity against prosecution of corporate debtor, to fill the necessary gaps in the process of insolvency by way of this amendment. The Act came into effect from 28th December 2019; however, it received the assent of president on 13th March 2020. The provisions that are amended under this Act are as follows:

1. A new proviso has been added in section 7 of the code, which empowers the authorized person as defined under section 21 clause 6(A) sub clause (a) and (b) to initiate the CIRP against the corporate debtor jointly by not less than 100 of such creditors in same class or not less than 10% of the total number of creditors, whichever is less. It further empowers the financial creditor who are also allottees under the real estate project to initiate the proceedings against the corporate debtor by filing the application jointly by not less than 100 such allottees or 10% of allottees under same real estate project whichever is less.

It further states that when the application has been filed in above two situation and the same has not been accepted by the adjudicating authority then the application should be modified in such manner that it will comply to the provisions laid down under this ordinance withing 30 days of passing of the ordinance. If a person failed to comply with this provision, the application filed by him shall be deemed to be withdrawn.

• The amendment has made in Section 11 of the code by inserting a new explanation to it. The section specifies the category of person who are not entitled to make application under the code. The explanation inserted so as to clarify that nothing will prevent the corporate debtor as referred under clause (a) to (d) of the section from initiating the CIRP against another corporate debtor.
• Section 14 of the code laid down the concept of moratorium that to be imposed during the initiation of the insolvency process, the amendment is made to insert a new explanation which will clarify the list of the documents which shall not be suspended or terminated during the time period when section 14 is imposed. This list includes license, permit, registration etc., the only condition imposed here is that there should be no default in making of the payment of current dues arising due to the use of such licenses.

Further clause 2A has been inserted to empower IRP or RP to preserve the goods or services of corporate debtor and also manage the operations as a going concern, in such case the supply of goods and services will not be terminated during the moratorium period unless the corporate debtor has not paid the dues arising out of such supply.

•  Amendment to Section 23 by adding the proviso to it, which empowers the RP to manage the operations of the corporate debtor even after the completion of the CIRP period, till the order of approving of the resolution plan has been given by the Adjudicating Authority.
• A new section 32A has been inserted so as to grant the immunity to the resolution applicant against any liability of the corporate debtor. The new section states that the liability of the corporate debtor against such offences which occurred prior to the initiation of CIRP shall cease from the date when the resolution plan is passed by the adjudicating authority. Further, no action will be taken against the property of the corporate debtor in relation to the offences which are occurred prior to the initiation of the proceedings under the code.

Effect of Amendment

The amendment clarified various concepts with regard to the corporate debtor. By inserting the explanation to section 14, the code simplifies the process, as list of things is provided which shall not stand terminated during the moratorium period. This will help the RP to help the company of the corporate debtor to come out from the insolvency process. If the conditions are fulfilled, the RP can help in raising money from the business of the corporate debtor and paying off its dues so that the company can be revived. Also, by including section 32A the property of the corporate debtor can be protected.

As per the amendment in section 23, the even if the prescribed time limit of the CIRP is lapsed due to some reasons the same will not disqualify the RP in holding the position in the company of the corporate debtor. The RP will be empowered to exercise the function in same manner as he was discharging them during the time period of CIRP. This grants immunity to RP and help him in finding the ways of reviving of the company.

Fourth Amendment: Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

The ordinance was passed on 5th June 2020 in view of the current pandemic COVID-19. The assembly was of the view that in order to secure the interest of the business, financial markets etc., some changes in the provision of the code were needed at urgent basis. Hence, the following changes has been made in the code:

1. Section 10A has been inserted which laid down the suspension of the initiation of proceedings against the corporate debtor under section 7, 9 or 10 of the code. It further states that no application shall be filed against the corporate debtor where the default is arising on or after 25th March 2020 for a period of six months which may extend to one year.
2. Further, the threshold limit for initiating the CIRP has been raised from 1Lakh to 1Crore.

Effect of Amended Ordinance:

The ordinance was passed due to the lockdown imposed by the Government of India in view of tackling with the current pandemic. The effect of such ordinance will help to secure the interest of various business, financial market etc., as the functioning of the same has stopped due to the same reason and in this situation it would be difficult for them to repay the amount of the debt owed by them.

Conclusion

The legislation has amended the code time to time so as to overcome the loopholes in the code and providing better functioning of various authorities appointed under the act in order to discharge the provisions of the code. The clarifications are being made in order to reduce the confusion regarding the functioning of the code. The main objective of the enactment of this code was to prevent the interest of the shareholders by maximizing the value of the assets owed by corporate debtor. The only way to achieve this is making amendments and clarifications time to time.

References:

[1] Point 3 of The Insolvency and Bankruptcy (Amendment) Ordinance, 2017

[2] www.blog.theleapjournal.org/2017/12/understangig-recent-ibc-amendment.html

[3] Point 6 of The Insolvency and Bankruptcy (Amendment) Ordinance, 2017

[4] Supra Note 2

[5] Section 3(12) of Insolvency and Bankruptcy (Second Amendment) Act 2018

[6] Section 5 (5A) of Insolvency and Bankruptcy (Second Amendment) Act 2018

[7] Section 5 (24A) of Insolvency and Bankruptcy (Second Amendment) Act 2018

[8] Section 10(3) of Insolvency and Bankruptcy (Second Amendment) Act 2018

[9] www.vinodkothari.com/20108/06/overview-of-insolvency-and-bankruptcy-ordinance-2018.html