The Insolvency and Bankruptcy Code (Amendment) Bill, 2017: Key Highlights and Implications.
[Mudit Nigam]
The author is a third-year student of National Law Institute University, Bhopal.
The President of India, in exercise his power under Article 123 of the Constitution of India, promulgated the ordinance titled the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”). The purpose of the Ordinance was to strengthen the insolvency resolution process by disqualifying certain persons from presenting a resolution plan under the Insolvency and Bankruptcy Code (“Code”). However, the same was widely debated as it imposed restrictions on presentation of resolution plan by connected persons thereby adversely affecting the initiation of corporate insolvency resolution process. In order to fill the gaps and clarify the position, the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 (“Bill”) was passed by Parliament in January, 2018 and currently awaits the President’s assent.
The Bill extends the application of the Code to the personal guarantors to the corporate debtor and the proprietorship firms who were earlier immune from any liability under the Code.[1] This has brought much needed clarity on initiation of insolvency process against the personal guarantors of the corporate debtor. Reference must be made to the judgment of the Allahabad High Court in case of Sanjeev Shriya v. State Bank of India, wherein the Court observed that moratorium issued under section 14 of the Code would be applicable to the proceedings initiated against the personal guarantors.[2] The applicability of the Code to proprietorship firms will ensure proper completion of insolvency resolution process against small and medium enterprises (SMEs), which often run on a proprietorship model.
A “resolution applicant” under section 5(25) of the Code includes any person who presents a resolution plan to the insolvency professional. However, after the amendment takes effect, the scope of the term would be limited only to such persons who fulfill the eligibility criteria prescribed by way of the amendment and who present a resolution plan in pursuance of the invitation by the insolvency professional under the amended section 25 (2)(h). The imposition of the eligibility criteria is likely to prevent unscrupulous persons from presenting a resolution plan and prevent unnecessary proceedings against the corporate debtor. Further, this change will give importance to the interests of the creditors as they will also have a say in approving the eligibility criteria. Another implication of this change is that it allows persons to jointly submit a resolution plan, thereby facilitating acquisition of large stressed assets.
The Bill further amends the duties of a resolution professional under section 25 of the Code. Prior to the amendment, the resolution professional had a duty to invite any prospective lender or investor, or any other person. However, after the amendment, a resolution professional would be under an obligation to impose certain eligibility criteria with the approval of the committee of creditors, which criteria would have to be fulfilled by a resolution applicant in order to qualify for an invitation to present a resolution plan. While deciding the eligibility criteria, regard shall be given to the complexity as well as the scale of operations of the corporate debtor’s business, in addition to other conditions as may be specified by the Insolvency and Bankruptcy Board of India.
The Bill inserts a new section 29A in the Code which expressly bars certain persons from presenting a resolution plan. Unlike the Ordinance, the Bill uses the expression ‘persons acting jointly or in concert,’[3] which implies that apart from the ineligible person, any other person acting together with such person for a common objective is also ineligible to be a resolution applicant. The new section also bars undischarged insolvents, disqualified directors,[4] willful defaulters,[5] promoters, and persons whose account has been classified as a non-performing asset by the Reserve Bank of India and a period of a year or more has been passed after such classification. However, the Bill allows such ineligible account holders to become eligible to submit a resolution plan if they clear all the overdue amounts with interest and other charges relating to their NPA accounts.[6] The section also disqualifies a person upon conviction for an offence punishable with 2 years of imprisonment or more. It is still unclear whether the person must be convicted for an economic offence or for any other offence as well, although the use of the word ‘any’ suggests that the nature of the offence is immaterial.
Unlike the Ordinance which disqualified a person who ‘has been’ prohibited by the Securities and Exchange Board of India (“SEBI”) from trading and accessing in securities market, section 29A as introduced by the Bill prohibits only a person who is currently barred by the SEBI. This brings more clarity as the Bill relaxes the earlier complete restriction imposed on persons who have been previously disqualified by the SEBI. The same section explicitly disqualifies a promoter or a person who in managerial or controlling capacity in the company/corporate debtor has indulged in unlawful transactions as decided by the National Company Law Tribunal (“NCLT”).
Much confusion lies on the presentation of a plan by the guarantor of a corporate debtor. The Ordinance as well as the Bill, under the newly introduced section 29A, bars guarantors of the corporate debtor against whom insolvency proceeding has been initiated. On December 18, 2017, the NCLT in the matter of MBL Infrastructure Limited, observed that the words ‘enforceable guarantee’ used in the section mean and refer to such class of guarantors within the entire class of guarantors who, on account of their antecedent, may adversely impact the credibility of the process under the Code. Thus, a guarantor cannot be disqualified only on the ground of existence of a binding contract of guarantee. However, an appeal has been preferred against this order and the matter is pending before the National Company Law Appellate Tribunal.
Under clause (j) of section 29A, persons ‘connected’ with the debarred persons are also ineligible to present the plan. Unlike the Ordinance, the Bill clearly explains the words ‘connected person’ as including promoters, persons in managerial capacity and holding or subsidiary company of the corporate debtor. This explanation has brought much clarity on the ambit of ‘connected persons’ which was missing in the Ordinance.
The Bill will also amend section 30 (4) of the Code by adding certain conditions for approval of a resolution plan by the committee of creditors. While approving the plan, the committee of creditors will consider the feasibility and viability of the execution of the resolution plan along with the voting requirements. The amended section will also prohibit the committee from approving any resolution plan submitted before November 23, 2017 and such plans can only be approved after fulfillment of the criteria provided in the Bill. In case the resolution applicant of the plan presented before such date becomes ineligible, the insolvency professional would be required to invite a fresh plan if no other plan is available. This retrospective condition as well as invitation of a fresh plan in case of ineligibility may negatively affect the resolution plans which are at the ultimate stage of their completion, and may also result in unnecessary litigation. However, unlike the Ordinance, the Bill provides a curative period of 30 days to the defaulters whose account has been classified as a non-performing asset.
The Bill seeks to amend section 35(1)(f) of the Code, thereby restricting the power of an official liquidator to dispose the property of the corporate debtor. The liquidator is allowed to sell the property, both movable and immovable, only to a person who is eligible to be a resolution applicant. This restriction further prevents unscrupulous persons from taking undue advantage of the insolvency process.
On the whole, the Bill appears to be a step in the right direction. It would be interesting to see how the amendments introduced by the Bill will shape the emerging insolvency jurisprudence in the country.
[1] The Insolvency and Bankruptcy Code (Amendment) Bill, 2017, § 2.
[2] “Liabilities Fluid; Guarantors protected under IBC: Allahabad HC,” Khaitan & Co Newsflash, last accessed on 8th January, 2018, https://www.khaitanco.com/PublicationsDocs/Khaitan%20&%20Co-Ergo-Newsflash-18Sept2017.pdf.
[3] The Bill, § 5.
[4] The Companies Act, 2013, § 164.
[5] Under Reserve Bank of India Guidelines on Wilful Defaulter.
[6] Aayush Mitruka, “Highlights of the Insolvency Amendment Bill, 2017,” IndianCorpLaw, last accessed on 9th January, 2018, https://indiacorplaw.in/2018/01/highlights-insolvency-amendment-bill-2017.html.